The Bank of Finland published three articles examining how declining central bank liquidity will change Eurosystem monetary policy implementation. As reserves fall, short term interest rate steering will increasingly rely on active money markets and refinancing operations, requiring banks to manage liquidity more actively and prepare to borrow from the Eurosystem. Euro area banking system reserves remain at approximately EUR 2,000 billion, keeping money market rates close to the European Central Bank’s deposit facility rate. Reserves are declining as securities purchased during the low inflation period and the COVID-19 pandemic mature. Main refinancing operations and three month longer term refinancing operations will continue as fixed rate tenders with full allotment and broad collateral eligibility. Future longer term structural refinancing operations and a structural bond portfolio will supplement these tools, although their design has not been decided. In an accompanying speech, Bank of Finland Board Member Tuomas Välimäki said main refinancing operations will play a central role in steering money market rates, while normal rate fluctuations will not necessarily require intervention if markets function properly and monetary policy transmission remains intact. The articles also consider how digitalization, tokenization and new payment systems could affect demand for central bank liquidity.
Bank of Finland outlines shift to active money markets as euro area reserves fall from about EUR 2,000 billion
The Bank of Finland outlined how declining euro area reserves will shift interest rate steering toward active money markets and Eurosystem refinancing operations. Banks will need to manage liquidity more actively, while future structural refinancing operations and a bond portfolio will supplement existing weekly and three month operations.