ECB’s Schnabel: New Framework Does Not Change Monetary Policy Stance

14 March 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel on Thursday said that the ECB’s monetary policy stance would not be impacted by the changes to the operational framework announced the previous day.

In a speech at the Money Market Contact Group meeting in Frankfurt, a text of which was published to the website of the ECB, Schnabel said, ‘The changes to our operational framework do not have any implications for our monetary policy stance, neither for our interest rate policy nor for our monetary policy bond portfolios, which we expect to continue to be run off.’

The new framework would enable effective control of short-term money market rates and leave room for ‘learning in an uncertain environment’, she said.

‘[T]he transition from a situation of abundant excess liquidity to one of less ample liquidity has few precedents and there is a lot of uncertainty about how market participants are going to adjust their behaviour’, she said.

Three key elements characterised the new framework: the demand-driven nature, the mix of instruments used to supply reserves and the fact that monetary policy was implemented though a ‘soft floor with a narrow spread’, she said.  

‘The chosen set of parameters reflects the trade-off central banks face between limiting volatility and setting incentives for banks to insure themselves against liquidity shocks in financial markets’, she said. ‘This trade-off depends on the cost of carry, which is the spread between the rate banks pay for borrowing reserves and the remuneration they receive when depositing these reserves back with the central bank.’

The implementation of monetary policy stance could benefit from a system in which reserves were supplied elastically and calibrated effectively, she said, ‘as it does not require the central bank to estimate the uncertain volume of reserves necessary to steer short-term money market rates towards the key policy rate.’

The deposit facility rate (DFR), which has acted as an anchor for money market rates, would continue to steer the ECB’s monetary policy stance, she said, and the spread between the main refinancing operations (MROs) and the DFR would be adjusted.

‘The relatively narrow spread of 15bp between the rate on the MROs and the DFR will limit the potential upward pressure on money market rates and set incentives for banks to borrow liquidity in our operations as our balance sheet normalises’, she said.

The spread between the marginal lending facility (MLF) and the MRO would remain unchanged at 25bp.

‘A “soft” floor meant that the Governing Council would tolerate deviations from the DFR, provided such movements do not blur the signal about the intended monetary policy stance. In other words, orderly deviations in both directions are accepted’, Schnabel said.

‘However, excessive volatility that would interfere with the monetary policy stance, or a persistent drift of money market rates away from the DFR, could require the framework parameters to be reviewed’, she continued.