Adjustment of the monetary policy framework

The ECB has completed the review of the operational framework for implementing monetary policy announced at the end of 2022 and publicized a number of changes, but also the retention of some parameters. The ECB is thus preparing for the time after the current surplus liquidity has been reduced, which should be the case in a few years' time. The decision to continue to steer the monetary policy stance via the deposit rate remains unchanged. The ECB assumes that short-term money market rates will evolve close to the deposit rate. In this context, it was also announced that the gap between the main refinancing rate and the deposit rate would be reduced from the current 50bp to 15bp as of 18 September 2024. The ECB hopes that this will increase the banks' participation in the weekly tenders and ultimately bring the money market rates closer to the deposit rate. The interest rate for the marginal lending facility will be brought closer to the deposit rate to the same extent and will therefore retain its current gap of 25bp to the main refinancing rate.

The ECB placed a major focus on providing liquidity via a wide range of instruments. This includes short-term main refinancing operations and longer-term refinancing operations with a three-month term. Both facilities continue to be conducted through fixed rate tenders with full allotment. A future expansion of the range of instruments is planned via structural longer-term refinancing transactions and a structural securities portfolio. Both instruments are to be an integral part of the ECB's toolbox for covering the structural liquidity requirements of the banking sector. The aim is to avoid any interference with the monetary policy course by the aforementioned instruments. Details on the design of the new instruments (e.g. term of the refinancing transactions and composition of the securities portfolio) are not yet known. An introduction before 2026 seems unlikely. The current reduction of the APP and PEPP securities portfolios is to be continued.

Banks are likely to have been relieved by the decision to leave the minimum reserve ratio at 1%. This allows banks to continue to invest their surplus liquidity at the current deposit rate of 4%. By contrast, the interest rate on the minimum reserve has been 0% since September 2023. In the run-up to today's decision, there were speculations that the ECB would raise the minimum reserve rate to at least 2%. Since the interest rate turnaround, the central banks' interest expenses have risen due to the higher deposit rates. Interest income from the mostly fixed-interest securities purchased, on the other hand, has remained virtually unchanged. An increase in the minimum reserve ratio would have reduced the central banks' interest costs. At the same time, this would have placed a greater burden on the profitability of smaller banks in particular with a larger share of deposits in refinancing.

Download The Full Credit Markets Special

This document is intended as an additional information source, aimed towards our customers. It is based on the best resources available to the authors at press time. The information and data sources utilised are deemed reliable, however, Erste Bank Sparkassen (CR) and affiliates do not take any responsibility for accuracy nor completeness of the information contained herein. This document is neither an offer nor an invitation to buy or sell any securities.

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD recovers toward 1.0850 as risk mood improves

EUR/USD recovers toward 1.0850 as risk mood improves

EUR/USD gains traction and rises toward 1.0850 on Friday. The improvement seen in risk mood makes it difficult for the US Dollar (USD) to preserve its strength and helps the pair erase a portion of its weekly losses. 

EUR/USD News

GBP/USD stabilizes above 1.2700 after downbeat UK Retail Sales-led dip

GBP/USD stabilizes above 1.2700 after downbeat UK Retail Sales-led dip

GBP/USD staged a rebound and stabilized above 1.2700 after dropping to a weekly low below 1.2680 in the early European session in response to the disappointing UK Retail Sales data. The USD struggles to find demand on upbeat risk mood and allows the pair to hold its ground. 

GBP/USD News

Gold rebounds to $2,340 area, stays deep in red for the week

Gold rebounds to $2,340 area, stays deep in red for the week

Gold fell nearly 4% in the previous two trading days and touched its weakest level in two weeks below $2,330 on Thursday. As US Treasury bond yields stabilize on Friday, XAU/USD stages a correction toward $2,340 but remains on track to post large weekly losses.

Gold News

Dogecoin inspiration Kabosu dies, leaving legacy of $22.86 billion market cap meme coin behind

Dogecoin inspiration Kabosu dies, leaving legacy of $22.86 billion market cap meme coin behind

Kabosu, the popular Shiba Inu dog that inspired the logo of the largest meme coin by market capitalization, Dogecoin (DOGE), died early on Friday after losing her fight to leukemia and liver disease.

Read more

Week ahead – US PCE inflation and Eurozone CPI data enter the spotlight

Week ahead – US PCE inflation and Eurozone CPI data enter the spotlight

Dollar traders lock gaze on core PCE index. Eurozone CPIs in focus as June cut looms. Tokyo CPIs may complicate BoJ’s policy plans. Aussie awaits Australian CPIs and Chinese PMIs.

Read more

Majors

Cryptocurrencies

Signatures