by Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank (ECB) wants to reduce the liquidity available to banks but it will try to do so gently enough so as not to disrupt the financial system or lending, a very recent result showed on Wednesday. expected from the review of the operational framework for the implementation of monetary policy.
During nearly a decade of low inflation, the ECB flooded banks with liquidity through massive bond purchases, aiming to encourage them to lend and spur price growth.
Therefore, banks no longer needed to borrow from each other and the overnight rate in the interbank market was aligned with the rate paid by the central bank for deposits.
This exceptionally generous operational framework was amended after a review that began in December 2022 to adapt it to a new era where inflation and interest rates are higher and liquidity injected into the system is drying up.
As part of the review of the operational framework, the ECB wants to encourage banks more to lend to each other, while putting in place safety nets to limit the risk of financial tensions.
“The framework will ensure that the implementation of our monetary policy remains effective, robust, flexible and efficient, in the future, as our balance sheet normalizes,” Christine Lagarde, president of the ECB, said in a statement.
The central bank of the 20 countries that share the euro said it would aim to keep short-term money market rates “at levels close” to its deposit rate, which is currently 4%.
But rather than injecting liquidity into the system on its own, the ECB will rely more on banks lending to each other as the bonds it has purchased mature and the surplus liquidity will leave the banking system.
Banks will still be able to ask the ECB for as much liquidity as they want, accompanied by guarantees, during its weekly main refinancing operations and its 90-day auctions.
In order to reduce the financial penalty and the stigmatization of borrowers who contact the central bank, the rate of these auctions, currently 4.50%, will be lowered in order to reduce the gap between this rate and the rate of the facility ECB deposit rate to 15 basis points, compared to 50 currently.
The ECB also plans to launch longer-term refinancing operations and bond-buying operations when it finds that its balance sheet has started to grow again thanks to bank borrowing.
“These operations will make a substantial contribution to covering the structural liquidity needs of the banking sector arising from autonomous factors and the constitution of reserve requirements,” the ECB said.
It is likely that future bond purchases will focus on shorter-dated bonds, rather than almost all bonds in the market, as is the case with the ECB’s stimulus programs.
The ECB plans to review the main parameters of the new framework in 2026, or earlier if necessary.
(Reporting Francesco Canepa; French version Diana Mandiá, edited by Blandine Hénault)
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