Monetary policy makes use of several specific instruments, and the policy is implemented by means of a number of procedures in which the national central banks perform a key role.
On the basis of the market economy principle which encourages the efficient allocation of resources, the Eurosystem operates mainly via transactions with credit institutions from anywhere in the euro area. It does not apply any regulations such as exchange controls or credit restrictions. The reserve requirements are the only regulatory instrument. The reserves all bear interest and no credit is granted on preferential terms, so that the operating framework of monetary policy does not offer any scope for implicit taxation or subsidies. Due to the issuing privilege which the Treaty has jointly conferred to the ECB and the national central banks, and the reserve requirements, credit institutions have to obtain liquidities from the Eurosystem. By varying the conditions whereat these liquidities are provided, the Eurosystem influences money market interest rates.
The Eurosystem uses three categories of instruments:
- open market operations among which main refinancing operations, which are weekly credit tenders with a one week maturity, play an important role.
- standing facilities
- reserve requirements
For more information: www.ecb.europa.eu
All monetary policy decisions are taken by the ECB Governing Council or the Executive Board, as centralisation is the only sure way of avoiding confusion over monetary policy signals and preventing distortion of competition. However, the ECB does call on the national central banks to execute the monetary policy operations. The national central banks are still the contact for credit institutions established in their territory.
The weekly credit allotments take place as follows :
- The ECB Governing Council determines the interest rate policy on the basis of an analysis of the economic and monetary situation of the euro area. Generally, the Council announces the minimum bid rate for the next allotments at the first meeting in each month.
- On the allotment day (usually Tuesday) the national central banks collect the bids from the credit institutions and pass them on to the ECB.
- On the basis of the Governing Council’s decisions, the ECB Executive Board determines the volume of credit (and the resulting marginal interest rate).
- The national central banks arrange the ensuing payments to the credit institutions, after checking the collateral which they offer.
The Eurosystem leaves the credit institutions to standardise interest rates in the euro area via their arbitrage operations. For that purpose, they can use the TARGET system, which ensures the efficient handling of cross-border payments and their final, immediate and secure settlement.