The European Central Bank's operational framework is a set of tools it uses to control the amount of money flowing through the economy in order to keep prices stable. The calibration of those tools determines how quickly and strongly the central bank can steer short-term interest rates and ultimately how monetary policy affects economic output and inflation. The operational framework concerns how a monetary decision is implemented, not what the decision is. Over the last 10 years, the ECB has introduced several new policy tools, which has led to a significant increase in excess liquidity – that is, reserves held by banks beyond minimum requirements. In the course of recent monetary tightening efforts, the ECB has started to shrink its balance sheet, and excess liquidity has fallen by about €1.2 trillion. The new operational framework is a reaction to ongoing changes in the liquidity environment, from a situation of abundant excess liquidity to one of less ample liquidity. To this end, the ECB has effectively made a small adjustment to the width of the corridor between two policy rates, which will be implemented as of September 2024. In addition, two new instruments will be added to the ECB monetary policy toolbox: a structural portfolio of assets, and long-term refinancing operations. No specific details have been provided on the new tools in terms of technical features or the timing of their introduction. Source : © European Union, 2024 - EP Read more