ECB Adopts New Monetary Policy Framework to Ensure Smooth Policy Transmission as Excess Reserves Decline
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Since 2015, the Eurosystem has operated under a de facto supply-driven floor system due to asset purchases and TLTROs injecting significant reserves. As reserves decline, there is uncertainty about when this could affect monetary policy transmission.
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The new operational framework is a hybrid system providing reserves elastically through lending operations and structural tools to control short-term rates while allowing learning given uncertainties.
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Refinancing operations are central for liquidity provision to reach all corners of the euro area against broad collateral, ensuring effectiveness and efficiency.
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A mix of short-term lending and new longer-term operations and a structural bond portfolio ensures robustness to provide liquidity through different instruments.
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A "soft" floor system with a narrow 15 basis point spread between key rates contains volatility in money market rates while preserving incentives for market activity as excess liquidity declines.