ECB Insight: Framework Announcement Tomorrow Likely to Signal Start of Transition Process

12 March 2024

By David Barwick – FRANKFURT (Econostream) – The European Central Bank is set to announce the outcome of its operational framework review on Wednesday, following a final meeting, held virtually, of the Governing Council.


The Council has already come to an agreement on all elements of the new operational framework, but still needs to sign off on the communication of the outcome, which has been an ongoing effort for a couple of weeks.


Barring an unpleasant surprise, the ECB should be able to communicate all the details in one large package tomorrow.


We feel safe in saying that the ECB’s preference is for a demand-driven system, as is widely anticipated. At the moment, this is of the floor type, owing to the vast quantity of excess liquidity slowly being drained, which keeps the market rate at the level of the ECB’s deposit facility.


In recognition of this, we expect the ECB to attach a lot of weight in the outcome of the review to remaining flexible and reconsidering its options when circumstances change. That is, the initial operating framework based on this review is not going to be written in concrete.


Rather, the ECB will doubtless regard the starting period as a transitional phase and indicate its expectation of moving to another system, pending the outcome of another review, in approximately three years’ time, when the environment will be one of significantly less liquidity.


Still, the ECB, fond of rules, can be anticipated to share certain guiding principles that will endure across systems even as the latter change.


We expect the ECB to plan on the short-term rate being near the DFR. We think the corridor with the MRO rate is going to have to be narrowed, and we think there is a decent chance that the ECB’s intentions in this regard will be announced tomorrow as well.


The ECB will also share its decisions regarding the minimum reserve ratio and the remuneration on these reserves.