Non-standard monetary policy measures

• to adopt a fixed-rate full allotment tender procedure for open market operations (since October 2008);
• to extend the maturity of open market operations (through six-month longer-term refinancing operations and three  one-year operations) and to conduct complementary three-month open market operations; and
• to expand the range of eligible assets that could be used as collateral in refinancing operations.

In the second phase of the crisis, which took the form of a sovereign debt crisis, the Eurosystem’s non-standard monetary policy measures aimed to address markets’ malfunctioning to reduce dispersion in financing conditions faced by businesses and households in different euro area countries.

• conducted the Securities Markets Programme (SMP) and intervened in the secondary market by purchasing government bonds issued by certain countries (from May 2010 to September 2012);
• purchased eligible covered bonds under its Covered Bond Purchase Programme − CBPP1 (July 2009-June 2010) and CBPP2 (November 2011-October 2012);
• carried out two Very Long-Term Refinancing Operations (VLTROs) with a maturity of three years (December 2011-February 2015);
• announced, in September 2012, Outright Monetary Operations (OMT), i.e. purchases of government bonds subject to strict conditionality. The programme has never been activated.

In the third phase of the crisis, the Eurosystem's non-standard measures were aimed to address the risk of deflation. With short-term interest rates already close to zero, the non-standard measures were intended to influence the whole constellation of interest rates that are relevant for financing conditions in the euro area.

• a negative interest rate on the deposit facility (since June 2014);
• Targeted Longer-Term Refinancing Operations (TLTROs), designed to support bank lending to businesses and households. The first series of operations (TLTRO I) was announced in June 2014, the second (TLTRO II) in March 2016 and the third (TLTRO III) in March 2019;
• forward guidance, which means communicating how the ECB expects its policy measures to evolve in the future and what conditions would warrant a change in the policy stance (since July 2013); and
• the expanded asset purchase programme (APP).

The spread of the coronavirus (COVID-19) in early 2020, has been a major shock to the growth prospects of the global and euro area economies. In the face of economic disruptions and heightened uncertainty in money markets the Eurosystem decided on a comprehensive package of monetary policy measures. Together with the monetary policy stimulus already in place to counter the financial crisis, these measures aim to the smooth provision of credit and better access to funds for those hardest-hit by the spread of the virus like households and small to medium-sized firms. To succeed in its scope, ECB made borrowing easier to banks by keeping its key interest rates at historically low levels, by initiating new refinancing operations and at the same time expanding the list of assets that banks can bring as collateral to get refinancing, and by increasing asset purchases to help boost spending and investments.

• additional longer-term refinancing operations (LTROs) to provide immediate liquidity support at favourable terms to the euro area financial system, followed by a new series of pandemic emergency longer-term refinancing operations (PELTROs) to preserve the smooth functioning of money markets during the pandemic,
• the application of considerably more favourable terms during the period from June 2020 to June 2022 to all outstanding TLTRO III operations, with the aim to support bank lending to those affected most by the spread of the coronavirus, in particular small and medium-sized enterprises,
• a temporary envelope of additional net asset purchases of €120 billion until the end of 2020, within the existing asset purchase programme (APP) of net purchases up to €20 billion per month, ensuring a strong contribution from the private sector purchase programmes. This envelope will further support favourable financing conditions for the real economy in times of heightened uncertainty,
• a new temporary asset purchase programme of private and public sector securities the Pandemic Emergency Purchase Programme (PEPP) with an overall envelope of €1.850 billion until at least the end of March 2022, to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the outbreak of the coronavirus. It is noted that the new PEPP includes the purchase of securities issued by the Greek government,
• the adoption of collateral easing measures to ensure that counterparties continue to be able to make full use of Eurosystem liquidity support,
• the enhancement of existing swap lines with central banks across the globe to ease strains in global funding markets and preserve financial stability.

The Eurosystem has a clear mandate to maintain price stability. This programme will help to bring inflation back to levels in line with the Eurosystem's objective.

But it will also help businesses across euro area to enjoy better access to credit, boost investment, create jobs and thus support overall economic growth, which is a precondition for inflation to return to and stabilise at levels close to 2%. 

The Eurosystem strictly adheres to the prohibition on monetary financing by not buying in the primary market. The Eurosystem will only buy bonds after a market price has formed. This ensures that the Eurosystem does not distort the market pricing of risk.

Outright purchases of marketable instruments are explicitly mentioned as a monetary policy instrument (in Article 18.1 of the Statute of the ESCB). This includes the possibility to purchase instruments such as government bonds, as long as they are bought on the secondary market from investors and not on the primary market, i.e. directly from Member States.

Many central banks have used outright purchases as part of their monetary policy. This practice, also known as quantitative easing or QE, has been employed by the Federal Reserve Board, the Bank of England and the Bank of Japan.

Outright purchases become useful when policy interest rates cannot be reduced any further. They can help central banks to fulfil their mandate, which in the case of the ECB is maintaining price stability, and thereby supporting economic growth and the creation of jobs.

The programme is designed to push inflation and inflation expectations back to levels closer to the Eurosystem’s objective in the euro area as a whole. It does not reduce the debt of any particular country.

Purchases under the programme influence broader financial conditions and, eventually, economic growth and inflation, through two main channels: direct pass-through and portfolio rebalancing.

Direct pass-through

When the ECB buys private sector assets, such as asset-backed securities and covered bonds, which are linked to loans that banks grant to households and firms in the real economy, the increased demand for these assets drives up their prices. This encourages banks to make more loans, which they can then use to create and sell more asset-backed securities or covered bonds. The increased supply of loans tends to lower bank lending rates for companies and households, improving broader financing conditions.

Portfolio rebalancing

The Eurosystem has purchased private and public sector assets from eligible counterparties that are financial institutions. The latter may choose to take the funds they receive in exchange for assets sold to the central bank and invest them in other assets. 

By increasing demand for assets more broadly, this mechanism of portfolio rebalancing pushes prices up and yields down, even for assets that are not directly targeted by the APP. This results in reduced costs (the effective market interest rate) for companies seeking to obtain financing on the capital markets. At the same time, the compression of yields on securities encourages banks to lend to companies or households. The increased supply of bank lending to the real economy tends to lower the costs of borrowing for households and firms. By lowering funding costs, asset purchases can stimulate investment and consumption. More dynamic demand from both firms and consumers will eventually contribute to returning inflation to below, but close to, 2% over the medium term.