Monetary policy

The monetary policy decisions taken by the ECB Governing Council are designed to ensure price stability. Price stability is the primary objective of the Eurosystem’s monetary policy. The OeNB’s governor is Austria’s representative on the ECB Governing Council and thus contributes to controlling price growth in the euro area.

What are they about?

Monetary policy in the euro area is designed to ensure that inflation remains stable at 2% and that, hence, the euro broadly keeps its internal value. Central banks can influence prices by taking certain measures. It is precisely these measures – also known as monetary policy instruments – that are determined in monetary policy decisions. One important measure is the adjustment of key interest rates. But there are other monetary policy instruments as well.

Who takes the decisions?

Within the Eurosystem, all euro area countries decide on monetary policy together. The central bank presidents of the participating countries get together on the ECB Governing Council and take a vote. The OeNB’s governor casts a vote on these decisions as the independent representative of Austria. When preparing for monetary policy decisions, the governor relies on the OeNB’s economic analyses and forecasts.

The ECB Governing Council usually meets twice a month. However, it only takes monetary policy decisions every six weeks. That means that the monetary policy meetings of the ECB Governing Council take place eight times a year. At press conferences, the monetary policy decisions are explained in detail afterwards.

Procedure and rotating votes

The euro area was launched in 1999 with 12 participating countries. To date, 21 countries have adopted the euro as their currency. To ensure that the ECB Governing Council’s ability to act is not compromised by the increasing number of members, a rotation system for voting rights has been agreed. The members of the ECB’s Executive Board have one vote at each meeting. The presidents of the 21 participating central banks share 15 voting rights, which rotate over time.

Under the rotation regime, the euro area countries are divided into two groups according to size of their economies and their financial sectors. The central bank presidents of the countries ranked one to five share four votes. The remaining 16 countries hold 11 voting rights. The right to vote rotates monthly.

To keep inflation in the euro area at our target of 2%, we can use various monetary policy instruments. Put simply, we can take steps that influence how much the things consumers buy ultimately cost. Decisions on the use of monetary policy instruments are taken by the ECB Governing Council, where the OeNB is represented.

Before the global financial crisis, monetary policy in the Eurosystem was primarily conducted through the setting of key interest rates. Sometimes a change in key interest rates is not enough to keep inflation stable at 2%. If key interest rates are close to their lower bound, the ECB Governing Council may, where appropriate, also steer monetary policy using other instruments. It has a large toolbox at its disposal for this purpose.

In addition to key interest rates and standard operations, the ECB Governing Council may also use other instruments to steer price trends. This may become necessary when key interest rates are close to their lower bound, or in order to maintain the smooth transmission of monetary policy signals. Such instruments include negative interest rates, forward guidance, asset purchases and longer-term refinancing operations.
 

Negative interest rates

Negative key interest rates mean that banks have to pay interest on their deposits with other banks and receive interest on the loans they take out. This makes it cheaper for banks to raise funds. They pass on these cost savings to their customers in the form of lower interest rates on loans.

While the interest rate on the main refinancing operations was lowered in several steps in 2008/09 and from 2011 to 2016 until it reached 0% in March 2016, the interest rate for the deposit facility was reduced below 0% in 2014 for the first time. It was gradually reduced further to -0.5% in 2019. A negative interest rate on the deposit facility meant that, between 2014 and 2019, banks had to pay interest on their deposits with the Eurosystem – rather than receiving interest, as is usually the case in “normal” times. 

Owing to the high level of excess liquidity, money market rates at that time were aligned with the deposit facility rate (the lower end of the key interest rate corridor), and money market rates were also pushed down to -0.5%. 
 

Forward guidance

As part of forward guidance, a central bank aims to steer market expectations by communicating its future policy on key interest rates. This makes it possible for ECB policies to guide interest rate expectations beyond the short horizon, i.e. to steer not only the very short-term money market rates but longer maturities as well. 

Forward guidance may be tied to a specific date or period of time. It may also be tied to certain conditions, so that markets are prepared for interest rates to change should a particular event occur (for example if a target value is reached). 

The ECB Governing Council used forward guidance between 2013 and 2022. In 2013, for example, it emphasised that the ECB’s key interest rates would remain at current or lower levels for an extended period of time. In doing so, it anchored market expectations, which also kept money market interest rates in check beyond the very short term.
 

Asset purchases

Securities purchases may be made for a variety of reasons. For example, a central bank can use them to lower long-term interest rates. These purchases cause the prices of the securities to rise. As a result, their implied returns fall. New bonds can therefore be issued at a lower interest rate, which makes it easier for the economy to borrow. Particularly when key interest rates reach their lower bound, this instrument can help bring about a further reduction in interest rates (especially for longer maturities).
 

Longer-term refinancing operations with extended maturities

These operations were introduced by the Eurosystem, both in response to the global financial and economic crisis and during the COVID-19 pandemic, to ensure that banks were able to provide the real economy with sufficient credit. 

The extended maturities make it easier for banks to refinance themselves and make it possible to plan for a longer term. In times of crisis, it is important for banks to have secure sources of funding. If banks were to become uncertain about their own refinancing, they, in turn, would become cautious about lending to households and businesses. In order to continue to provide the real economy with sufficient credit, banks need a reliable source of refinancing in times of uncertainty. 

The Eurosystem uses a range of monetary policy tools to implement its monetary policy decisions. They are used to manage short-term market interest rates and liquidity within the banking system. This ensures a smooth transmission of monetary policy decisions to the economy. 

Monetary policy decisions are implemented by the national central banks of the euro area. The European Central Bank (ECB) decides on the operations to be used and on the conditions to be applied. In Austria, the OeNB is responsible for carrying out monetary policy operations.

Open market operations

Open market operations – also known as tender operations – are transactions carried out by central banks through which they influence liquidity in the banking system and can thereby steer short-term money market rates to a level close to the key interest rate. By doing so, central banks can increase or reduce the available liquidity. 

Main refinancing operations

The ECB’s standard tenders are designed to provide banks with money. The most important ones are the weekly tenders, also known as main refinancing operations. These tender operations take place every week and usually have a maturity of seven days. At present, these operations are conducted at a fixed interest rate, and banks receive the desired amount of central bank money provided they deposit sufficient collateral.

Longer-term refinancing operations

In addition, tender operations with a maturity of three months are offered once a month; these are also known as three‑month‑tenders. Through these operations, the ECB provides banks with longer-term liquidity. The interest rate applied corresponds to the average interest rate on weekly tenders, and here too, the banks receive the full amount of liquidity they request in return for collateral.

Operations in foreign currencies 

A number of important central banks have joined forces and established mutual currency swap lines that are available as standing facilities. These serve as an important liquidity reserve to alleviate any tensions in the global financial markets. In the past, various liquidity-providing operations in foreign currencies have been offered based on this agreement. The Eurosystem currently conducts weekly tender operations in USD to provide liquidity, with a maturity of one week. These are not part of the standard tenders.

Standing facilities

Unlike open market operations, standing facilities are monetary policy operations carried out on the initiative of central banks’ counterparties. The Eurosystem offers two standing facilities: the marginal lending facility and the deposit facility. The marginal lending facility is in place to help counterparties meet their short-term liquidity needs. The deposit facility offers counterparties the possibility to deposit funds with the Eurosystem.

The main purpose of the standing facilities is to establish a corridor through which the overnight interest rates can be steered. As access to these facilities is not subject to any quantitative restrictions (apart from the collateral required for the marginal lending facility), the interest rate on the marginal lending facility and the interest rate on the deposit facility generally represent the upper and lower limit of the overnight rate on the money market. Changes to the interest rates on standing facilities generally have an immediate impact on overnight rates, such as the €STR.

Minimum reserves

The minimum reserve is a compulsory deposit that Austrian banks are required to hold on accounts with the OeNB. However, banks do not have to adhere strictly to the prescribed amount every day; instead, they can maintain it on average over a specific period. This enables banks to offset short-term fluctuations in liquidity using their own reserves without having to trade on the money market – for example, if large numbers of people suddenly withdraw cash. This helps prevent sharp fluctuations in interest rates. Stable money market rates enhance the clarity of monetary policy signals and make it easier for banks to plan their liquidity reserves.

The minimum reserve period spans a period of six to seven weeks, in line with the ECB Governing Council’s schedule for monetary policy meetings. The minimum reserve requirement is recalculated for each reserve maintenance period on the basis of specific customer deposits. The OeNB checks whether Austrian banks are complying with their minimum reserve requirements. If a bank holds insufficient funds in its minimum reserve account, the requirement is deemed not to have been met and the OeNB may impose a penalty on behalf of the ECB. Since December 2023, the ECB has been publishing details of such penalties on its website.

Eurosystem collateral framework

Banks that are counterparties of the OeNB may participate in the Eurosystem’s monetary policy operations. This means that banks can obtain liquidity from the Eurosystem via the OeNB if they provide collateral of sufficient quantity and quality in return. The assets that can be used as collateral may be marketable (e.g. bonds) or non-marketable (credit claims) and may be used throughout the Eurosystem. For assets to be considered eligible as collateral, they must meet the eligibility criteria laid down by the Eurosystem, which are set out in a number of guidelines.

Collateral is managed via the Eurosystem Collateral Management System, a joint IT system operated by the central banks of the euro area and part of the TARGET Services.

Monetary policy operations beyond the standard toolkit

Longer-term refinancing operations with extended maturities

While the refinancing operations in the Eurosystem’s standard repertoire have maturities of one week or three months, the maturities of these operations may be longer. In the past, the Eurosystem has offered extended maturities ranging from one month to four years. 

Asset purchases

Under its asset purchase programmes, the Eurosystem may buy various types of assets. In the past, it has mainly acquired government bonds and, to a lesser extent, corporate bonds, covered bonds issued by banks and asset-backed securities.