15 March 2024

Bruegel's Demertzis/Papadia:The European Central Bank’s timid operational framework update

Much ado about nothing. The Shakespearean expression conveys the message that great expectations often presage disappointment. This applies well to the European Central Bank’s review of its monetary policy operational framework – the set of tools through which the ECB transforms words into market facts. The review was announced in December 2022, but when published finally by the ECB Governing Council on 13 March left more issues undecided than concluded. ECB executive board member Isabel Schnabel on 14 March clarified many analytical points but could obviously not go beyond the substantive decisions taken by the Governing Council.

The review gives no indication of the desired amount of excess liquidity to be left in the system, nor any indication of the parameters for establishing the desired amount. No information is given about the conditions applying to the ECB’s new longer-term lending facilities – for instance their maturity or whether variable or fixed rates will apply. Similarly, no indication is given about the duration, composition and size of the so-called structural portfolio of securities that the ECB will hold for monetary policy purposes.

The timing for the introduction of the new longer-term lending facilities and of the portfolio of securities is, somewhat oddly, given as “once the Eurosystem balance sheet begins to grow durably again,” as if the growth of the balance sheet was an exogenous fact and not a critical variable the ECB should decide on. Indeed, the timing of the introduction of the structural facilities and the portfolio of securities is crucial to avoid instability of the market overnight rate when excess liquidity reduces.

Another issue that the review should have looked at is the possible access of non-bank financial institutions to central bank lending or deposit facilities. Non-bank financial institutions have greatly increased their share of intermediation in the euro area but have no direct interaction with the central bank. Other central banks, such as the Fed and the Sveriges Riksbank, have allowed some kind of access or are considering it.

Yet another issue one could have hoped to see in the review is the potential effect of the introduction of a central bank digital currency – the digital euro – on bank liquidity and thus on the provision of liquidity from the ECB. Curiosity on this point will have to wait longer until the two dossiers – the digital euro and the operational framework – are jointly considered.

Bruegel

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