On Thursday 14 March, Isabel Schnabel, member of the Executive Board of the European Central Bank (ECB), provided further details on the rationale behind the revision of the Eurosystem’s operational framework (see EUROPE 13370/33).
In particular, Ms Schnabel felt that a “flexible” floor, where “orderly” deviations in both directions from the deposit facility rate (DFR) are tolerated, with a narrow corridor, would limit volatility and encourage market activity. However, excessive volatility is likely to interfere with the monetary policy stance and may require a review of the key parameters of the framework.
This tolerance, she stressed, “reflected the desire by policymakers to promote interbank market activity and keep the central bank balance sheet as lean as possible”.
Ms Schnabel also indicated that the key parameters chosen reflected the trade-off - linked to the cost of carry - faced by central banks, between limiting the volatility of rates on the markets and encouraging banks to protect themselves against liquidity shocks on the markets.
It considered that a spread of 15 basis points was likely to promote the financial soundness of the Eurosystem’s balance sheet and financial stability.
However, Ms Schnabel stressed that the transition to a situation of less abundant liquidity was leading to a great deal of uncertainty as to the behaviour of market players. The new framework includes provisions for a review in 2026 (see EUROPE 13370/33).
Ms Schnabel also explained that the size and composition of the new structural bond portfolio, as well as the duration of the new longer-term refinancing operations planned when the Eurosystem’s balance sheet starts to grow again on a sustainable basis, will be chosen “so as to minimise their impact on the monetary policy stance, market functioning and moral hazard, and to facilitate the ECB’s pursuit of its secondary objective by incorporating considerations related to climate change”.
For further information, go to https://aeur.eu/f/bbs (Original version in French by Émilie Vanderhulst)