Liquidity conditions and monetary policy operations in the period from 31 January to 2 May 2018

Prepared by Riccardo Costantini

Published as part of the ECB Economic Bulletin, Issue 4/2018.

This box describes the ECB’s monetary policy operations during the first and second reserve maintenance periods of 2018, which ran from 31 January to 13 March 2018 and from 14 March to 2 May 2018 respectively. During this period the interest rates on the main refinancing operations (MROs), the marginal lending facility and the deposit facility remained unchanged at 0.00%, 0.25% and ‑0.40% respectively.

During the review period, the Eurosystem continued to purchase public sector securities, covered bonds, asset-backed securities and corporate sector securities as part of its asset purchase programme (APP), with a target of €30 billion of purchases on average per month. The purchases will continue at this pace until September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.

Liquidity needs

In the period under review, the average daily liquidity needs of the banking system, defined as the sum of net autonomous factors and reserve requirements, stood at €1,362.6 billion, an increase of €90.3 billion compared with the previous review period (i.e. the seventh and eighth maintenance periods of 2017). This increase in liquidity needs was attributable to an increase in average net autonomous factors, which rose by €89.4 billion to €1,238.5 billion during the review period, while minimum reserve requirements increased by €0.9 billion to €124.2 billion.

The growth in net autonomous factors, which implies absorption of liquidity, resulted from a decrease in liquidity-providing factors and an increase in liquidity-absorbing ones. The decline in liquidity-providing factors was due in particular to average net foreign assets denominated in euro, which fell by €38.9 billion to €212.8 billion. This resulted from higher Eurosystem liabilities to non‑euro area residents which increased on average by €33.4 billion in the period under review, thus providing a negative contribution to average net foreign assets denominated in euro.^[1] On the liability side, the most relevant increase related to government deposits, which increased on average by €39.2 billion to €227.5 billion.

The day-to-day volatility of autonomous factors remained broadly unchanged from the previous review period. The daily fluctuations of autonomous factors came primarily from government deposits and net assets denominated in euro.

Liquidity provided through monetary policy instruments

The average amount of liquidity provided through open market operations – both tender operations and APP purchases – increased by €91.0 billion to €3,219.8 billion (see Chart A). This increase was fully attributable to the APP while demand in tender operations decreased marginally.

The average amount of liquidity provided through tender operations declined slightly over the review period, by €3.5 billion to €761.7 billion. This decrease was primarily due to a lower average outstanding amount of targeted longer-term refinancing operations (TLTROs), which decreased by €2.1 billion. The decline in outstanding TLTRO funds was related to the settlement of the voluntary repayments of the third, fifth and seventh operations of the TLTRO‑I series in March 2018. The average liquidity provided through MROs decreased by €1.2 billion and the average amount of liquidity provided through three‑month longer-term refinancing operations (LTROs) fell by €0.1 billion.

Liquidity provided through the Eurosystem’s monetary policy portfolios increased by €94.8 billion to €2,458 billion on average, on the back of the APP purchases. Liquidity provided by the public sector purchase programme, the third covered bond purchase programme, the asset-backed securities purchase programme and the corporate sector purchase programme rose on average by €74.5 billion, €8.3 billion, €0.7 billion and €15.6 billion respectively. The reduction in liquidity resulting from redemptions of bonds held under the Securities Markets Programme and the previous two covered bond purchase programmes totalled €4.6 billion.

Excess liquidity

As a consequence of the developments detailed above, average excess liquidity remained broadly stable in the period under review, increasing only marginally, compared with the previous period, by €0.9 billion to €1,856.7 billion (see Chart A). The increase in liquidity through the APP was almost entirely offset by an increase in autonomous factors, mainly in the second maintenance period. In fact, while excess liquidity grew by €37.6 billion in the first maintenance period, it declined by €39.2 billion in the second maintenance period.

With a view to the allocation of excess liquidity holdings between current accounts and the deposit facility, average current account holdings grew by €10.8 billion to €1,304.6 billion, while the average recourse to the deposit facility declined by a further €9.2 billion to €676.4 billion.

Interest rate developments

Overnight money market rates remained close to the deposit facility rate, or slightly below it for specific collateral baskets in the secured segments. In the unsecured market, the euro overnight index average (EONIA) averaged ‑0.364%, compared with an average of ‑0.351% in the previous review period. EONIA fluctuated between a low of ‑0.370% at the end of February 2018 and a high of ‑0.348% on the last day of March 2018. In the secured market, average overnight repo rates in the general collateral (GC) Pooling market^[2] remained stable for both the standard collateral basket and the extended collateral basket relative to the previous review period. The average overnight repo rate stood at ‑0.448% for the standard collateral basket while the average overnight repo rate for the extended collateral basket was ‑0.415%.

The March 2018 quarter-end decline in core repo rates was less pronounced compared with the end of the first quarter of 2017 and was widely perceived as a non-event. For example, at the end of March 2017 overnight GC repo rates on French collateral declined by 12 basis points to ‑0.54% while German collateral declined by 34 basis points to ‑0.78%. At the end of March 2018 the same figures declined by only 4 basis points and 6 basis points to ‑0.46% and ‑0.47% respectively. This suggests that market participants have adopted more efficient practices for collateral management. Moreover, this development also suggests positive effects from the public sector purchase programme securities lending facility.