Monetary Policy Instruments
In the Eurosystem we provide the requisite central bank money (liquidity) via our standard monetary policy instruments, while non-standard instruments are used to target additional changes in certain circumstances, e.g. reducing uncertainty, reducing the level of long-term interest rates, or encouraging lending to households and corporates.
The monetary policy instruments of the national central banks, including Banka Slovenije, are provided under the same conditions in all euro area countries. The legal basis consists of the ECB guidelines and decisions on monetary policy implementation, which are published here. The legal basis in Slovenia consists of the General terms and conditions for implementing the monetary policy framework, which implement the ECB guidelines, and the ECB decisions, which apply in Slovenia directly without the need for transposition into Slovenian law via Banka Slovenije regulations. Banks accept the general terms and conditions by signing an Agreement of accession to the General terms and conditions for implementing the monetary policy framework with Banka Slovenije.
The Eurosystem monetary policy instruments are as follows:
open market operations,
standing facilities, and
minimum reserves.
Monetary policy implementation is designed to ensure that a broad range of banks (i.e. counterparties) participate in the instruments under the same conditions. Counterparties access the instruments at their domestic national central bank. Banka Slovenije’s counterparties are banks and savings banks established in Slovenia, and branches of foreign banks in Slovenia. They need to be subject to the minimum reserve requirements, be financially sound, be subject to banking supervision, and hold a main cash account in the TARGET-Slovenija system.
Open market operations
We usually use open market operations to maintain the requisite amount of liquidity in the system. They are announced through communications to counterparties. We have five types of open market operations at our disposal:
credit operations in the form of secured loans or repo operations, for which counterparties are required to provide sufficient eligible collateral,
outright transactions, where we make outright purchases/sales of financial assets, usually securities,
ECB debt certificates,
foreign exchange swaps,
fixed-term deposits taken from banks.
Open market operations are divided into four categories in terms of aim, frequency and procedure:
Main refinancing operations are credit operations offered once a week, and generally have a maturity of one week. They are offered according to a calendar announced in advance (Calendar of tenders and reserve maintenance periods).
Longer-term refinancing operations are additional credit operations offered once a month, with a maturity of three months (Calendar of tenders and reserve maintenance periods). They may also be offered at longer and shorter maturities.
Fine-tuning operations are executed on an ad hoc basis when there is a need to manage liquidity and to steer interest rates. They are primarily executed as credit operations and fixed-term deposits, but may also take the form of foreign exchange swaps.
Structural operations are used when there is a desire to adjust the structural position of the money market, for example by reducing the liquidity surplus held by banks vis-à-vis the Eurosystem. They include the issuance of ECB debt certificates, credit operations and outright transactions.
Standing facilities
The standing facilities give banks the opportunity to place their daily liquidity surplus or borrow their daily liquidity shortfall via two overnight instruments at the interest rates applying to the deposit facility and the marginal lending facility. In circumstances when the banking system holds a significant surplus vis-à-vis the Eurosystem, it is the deposit facility rate that is the largest factor in determining the overnight interest rate.
Banks are required to provide eligible collateral when using the marginal lending facility.
Minimum reserves
Under the Regulation of the ECB on the application of minimum reserve requirements, the Eurosystem requires banks to hold deposits in an account with their national central bank, where the average balance of the account over the reserve maintenance period (which is usually six weeks) must be no less than the requirement. Meeting the reserve requirements on average over the maintenance period allows banks to balance the effects of temporary fluctuations in liquidity without any impact on the prevailing market interest rate for overnight placements. The money in these accounts can be used freely for placement by banks, and up to the amount of the requirement was remunerated at the rate for main refinancing operations until 20 December 2022, was remunerated at the deposit facility rate between 21 December 2022 and 19 September 2023, and has not been remunerated as of 20 September 2023.
The minimum reserve requirements for banks are set with regard to their liabilities to households, corporates and the government sector. A reserve ratio of 1% applies to liabilities with a maturity of up to two years, while a ratio of 0% applies to liabilities with longer maturities.
The calendar of reserve maintenance periods for each year is announced in advance. The reserve maintenance period begins on the settlement day of the first main refinancing operation following the meeting of the Governing Council of the ECB where the decision on ECB interest rates is made.
Other monetary policy instruments
Before the global financial and economic crisis we primarily pursued monetary policy by setting interest rates at the ECB, but the advent of the crisis led to an expansion of the toolkit of open market operations. The additional instruments were used during periods of weakened monetary policy transmission, when the ECB policy rates had reached their effective lower bound, i.e. when any further reduction in the policy rates would not have been able to further loosen the monetary policy stance in periods when this was necessary to prevent deflationary pressures. This was particularly evident during the time of the sovereign debt crisis in certain euro area countries in the early 2010s, and during the Covid-19 pandemic in 2020. These instruments included full allotment in the standard credit operations, the expansion of the pool of eligible collateral for those operations, targeted and credit operations with multi-year duration, and asset purchase programmes. Some of the measures remain in effect, and have been included in the toolkit that we have at our disposal to maintain price stability.
All monetary policy credit operations are offered in the form of a fixed-rate tender with full allotment, where the amount of borrowing is limited solely by the amount of eligible collateral that can be provided by counterparties. In addition to the ordinary three-month LTROs, banks were also offered several extraordinary LTROs via tenders. They included targeted longer-term refinancing operations (TLTROs) with a maturity of up to four years, where the maximum amount of borrowing and the interest rate depended on the rate of growth in bank lending to households and corporates. The pandemic emergency longer-term refinancing operations (PELTROs) were offered to banks with the aim of providing a liquidity backstop. Foreign currency liquidity has been available to banks since December 2007 in the form of operations denominated in US dollars (and sometimes also in Swiss francs).
The asset purchase programme (APP) was introduced by the Eurosystem in October 2014. The programme was divided into three phases: (i) an active phase of net purchases, and two phases of the gradual unwinding of the programme, namely (ii) reinvestment at maturity and (iii) discontinuation of purchases. Having been made at varying pace over the duration of the programme, the net purchases were discontinued in July 2022. The reinvestment of the principal of maturing securities purchased under the programme was discontinued in July 2023. This means that the APP portfolio will be gradually reduced as the securities mature. The following asset classes were purchased under the APP: public sector bonds, corporate bonds, covered bonds and asset-backed securities.
For more information about the individual programmes, see the ECB website.
The pandemic emergency purchase programme (PEPP) was introduced in March 2020 with the aim of maintaining favourable financing while preventing the pandemic from having an adverse impact on inflation. The purchases encompassed all asset classes eligible under the APP, and also certain short-term debt securities and securities issued by the Greek government. Net purchases were made under the PEPP until the end of March 2022. The reinvestment of principal payments from maturing securities purchased under the programme was discontinued in the end of 2024. Since July 2022 the reinvestment has been carried out flexibly with regard to jurisdiction, asset class and maturity as necessary to maintain the functioning of the monetary policy transmission mechanism.
Securities from the APP and PEPP portfolios at Banka Slovenije are lent to market participants. For more information, see here. More information about the PEPP can be found in this press release.
The transmission protection instrument (TPI) was introduced in July 2022. It aims to maintain the uniform and homogenous transmission of the monetary policy stance throughout the euro area, which is the first condition for meeting the inflation target. The instrument is activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area. Once activated, the asset purchases will initially focus on public sector securities with a residual maturity of one to ten years. Purchases will only be allowed in countries that meet specific conditions. The scale of the purchases is not restricted ex ante, and will depend on the severity of the risks facing monetary policy transmission. The purchases will be made such that they do not impact the monetary policy stance. For more information about the TPI, see the press release on the ECB website.
Outright monetary transactions (OMTs) have been allowed since August 2012. The programme aims to safeguard monetary policy transmission and to preserve its singleness. Purchases on secondary markets for government bonds are contingent on the country’s participation in a macroeconomic adjustment programme or a precautionary programme of the European Stability Mechanism (ESM). The programme has not been used to date.
For more about OMTs, see the press release on the ECB website.
For more information about the individual operations, see the ECB website.