Monetary Policy Operations 

Open Market Operations

Open market operations (OMO) are monetary policy operations conducted at the initiative of the ECB. They play an important role in steering interest rates, managing the liquidity situation in the market and signalling the monetary policy stance.

Five types of instruments are available to the Eurosystem. The most important instrument is reverse transactions, which are applicable on the basis of repurchase agreements or collateralised loans. The Eurosystem may also make use of outright transactions, issuance of debt certificates, foreign exchange swaps and collection of fixed-term deposits.

There are three main types of open market operation:

  • Main refinancing operations
  • Longer-term refinancing operations
  • Fine-tuning operations 

Main refinancing operations

Main refinancing operations (MRO) are regular liquidity-providing reverse transactions with a frequency and maturity of one week. The bank organises standard tenders according to a pre-specified calendar. MROs play a pivotal role in signalling the policy rate and they provide the bulk of refinancing to the financial sector.

Longer-term refinancing operations

Longer-term refinancing operations (LTRO) are liquidity-providing reverse transactions with a monthly frequency and a maturity of three months. They are executed by the NCBs on the basis of standard tenders and according to a pre-specified calendar. LTROs aim to provide counterparties with additional longer-term refinancing. As a rule, the Eurosystem does not to send interest rate signals to the market by means of these operations.

Fine-tuning operations

Fine-tuning operations can be executed on an ad hoc basis to manage the liquidity situation in the market and to steer interest rates. In particular, they aim to smooth the effects on interest rates caused by unexpected liquidity fluctuations. Fine-tuning operations are primarily executed as reverse transactions, but may also take the form of outright transactions, foreign exchange swaps and collection of fixed-term deposits.They will normally be executed through quick tenders or bilateral procedures. The Eurosystem may select a limited number of counterparties to participate in fine-tuning operations.

Standing Facilities 

Standing facilities, in contrast to OMOs, are conducted at the initiative of eligible credit institutions. They aim to provide and absorb overnight liquidity, signal the general monetary policy stance and bound overnight market interest rates. There is little incentive for credit institution’s to use standing facilities, as the interest rates applied to them are normally unfavourable when compared with interbank rates. Two standing facilities are administered by the Bank:

  • Marginal lending facility. Counterparties can use the marginal lending facility to obtain overnight liquidity from the Bank against eligible assets. The interest rate on the marginal lending facility normally provides a ceiling for the overnight market interest rate.
  • Deposit facility. Counterparties can use the deposit facility to make overnight deposits with the Bank. The interest rate on the deposit facility normally provides a floor for the overnight market interest rate.