Liquidity conditions and monetary policy operations from 31 January to 16 April 2024

Prepared by Juliane Kinsele and Vagia Iskaki

Published as part of the ECB Economic Bulletin, Issue 4/2024.

This box describes liquidity conditions and the Eurosystem monetary policy operations during the first and second reserve maintenance periods of 2024. Together, these two maintenance periods ran from 31 January to 16 April 2024 (the “review period”).

Average excess liquidity in the euro area banking system continued to decline over the review period. This was due to the maturing of the seventh operation under the third series of targeted longer-term refinancing operations (TLTRO III.7) and early repayments by banks of outstanding amounts under other TLTRO III operations on 27 March 2024. Liquidity provision also declined due to the discontinuation of reinvestments under the asset purchase programme (APP) at the beginning of July 2023. However, the lower liquidity provision was partly offset by the continued decline in liquidity-absorbing net autonomous factors.

Liquidity needs

The average daily liquidity needs of the banking system, defined as the sum of net autonomous factors and reserve requirements, decreased by €99.7 billion to €1,531.2 billion over the review period. This was due almost entirely to a €98 billion decline in net autonomous factors to €1,369.7 billion (see the section of Table A entitled “Other liquidity-based information”) that was driven by both a decrease in liquidity-absorbing autonomous factors and an increase in liquidity-providing autonomous factors. Minimum reserve requirements fell by €1.7 billion to €161.5 billion.

Liquidity-absorbing autonomous factors decreased by €33.7 billion to €2,619.7 billion over the review period, owing mainly to a continued decline in non-monetary policy deposits and banknotes in circulation. Government deposits (see the section of Table A entitled “Liabilities”) declined by €27.7 billion on average over the review period to €154.6 billion. This reflects the continued normalisation of the overall volume of cash holdings of national treasuries with the Eurosystem, which was also encouraged by the changes to the remuneration of government deposits with the Eurosystem that came into effect on 1 May 2023. On 16 April 2024 the Governing Council confirmed the remuneration ceiling of these deposits at the euro short-term rate (€STR) minus a spread of 20 basis points, although the national central banks may decide to apply a lower rate based on domestic considerations.^[1] Other non-monetary policy deposits included under other autonomous factors also continued to decline.^[2] The normalisation of repo market conditions amid the easing of collateral scarcity issues also made placing non-monetary policy deposits in the market a more attractive option. The average value of banknotes in circulation decreased by €9.1 billion over the review period to €1,544.6 billion, reflecting the ongoing reduction in banknote holdings observed since negative policy rates were phased out.

Liquidity-providing autonomous factors rose by €64.1 billion to stand at €1,250.3 billion. Net assets denominated in euro increased by €29.3 billion over the review period, largely as a result of the continued reduction in liabilities to non-euro area residents denominated in euro. This, in turn, reflects the adjustment to the cash management strategies of customers of the Eurosystem reserve management services (ERMS) seen since the change in the remuneration of deposits held under the ERMS framework to €STR minus 20 basis points came into effect on 1 May 2023 and was confirmed as such on 16 April 2024.^[3] Net foreign assets increased by €34.8 billion, owing primarily to the revaluation in the second reserve maintenance period of certain foreign reserve assets, which rose by €29.0 billion. However, this increase was counterbalanced by revaluation adjustments included under other autonomous factors.

Table A provides an overview of the autonomous factors discussed above and their changes.^[4]

Liquidity provided through monetary policy instruments

The average amount of liquidity provided through monetary policy instruments decreased by €199.9 billion to €4,959.5 billion over the review period (Chart A). The reduction in liquidity was driven primarily by the ongoing decline in the amounts provided through credit operations.

The average amount of liquidity provided through credit operations fell by €123.5 billion to €334 billion over the review period. This decrease largely reflects the decline in outstanding TLTRO III amounts owing to the maturing of TLTRO III.7 (€215.4 billion), together with early repayments of other TLTRO funds amounting to €35.8 billion on 27 March 2024. At the same time, there was also a slight decrease in the overall outstanding amounts of Eurosystem standard refinancing operations – main refinancing operations (MROs) and three-month longer-term refinancing operations (LTROs). This was driven largely by an average decline in MROs of €3.7 billion, while three-month LTROs increased by €2 billion. The limited participation of banks in these operations and their ability to repay sizeable TLTRO funds without switching to regular refinancing operations reflect their comfortable liquidity positions on aggregate and the availability of alternative funding sources at attractive rates.

The average amount of liquidity provided through holdings of outright portfolios decreased by €76.5 billion over the review period. This decline was due to the discontinuation of reinvestments of principal payments from maturing securities under the APP since 1 July 2023. Under the pandemic emergency purchase programme, the principal payments from maturing securities have been fully reinvested since net purchases were discontinued at the end of March 2022.^[5],[6]

Chart A

Changes in liquidity provided through open market operations and excess liquidity

Excess liquidity

Average excess liquidity decreased by €100.2 billion to reach €3,428.3 billion over the review period (Chart A). Excess liquidity is the sum of banks’ reserves above the reserve requirements and the recourse to the deposit facility net of the recourse to the marginal lending facility. It reflects the difference between the total liquidity provided to the banking system and the liquidity needs of banks to cover minimum reserves. After peaking at €4,748 billion in November 2022, average excess liquidity has declined steadily, owing mainly to the maturing and early repayment of TLTRO III funds, with the discontinuation of reinvestments under the APP also contributing to this fall since July 2023.

Interest rate developments

The Governing Council kept the three key ECB interest rates unchanged over the review period. The rates on the deposit facility, the MROs and the marginal lending facility remained at 4.00%, 4.50% and 4.75% respectively.

The average €STR was broadly unchanged over the review period, while maintaining a stable spread with the ECB’s key policy rates. The €STR traded, on average, 9.2 basis points below the deposit facility rate throughout the review period, thus slightly higher than the average spread of 9.9 basis points for the 2023 reserve maintenance periods. The lower excess liquidity has not, therefore, had a material upward impact on the €STR so far.

The average euro area repo rate, as measured by the RepoFunds Rate Euro index, continued to trade closer to the deposit facility rate. On average, the repo rate was 4.9 basis points below the deposit facility rate over the review period, having increased by approximately 2.5 basis points compared with the previous period. This reflects the continued reversal of factors that have been exerting downward pressure on repo rates since the last quarter of 2023. These include the repricing of interest rate expectations, which encourages financial intermediaries to take long positions in bonds funded by repos, and the greater availability of collateral, amid the decline in outstanding APP holdings and the release of mobilised collateral from maturing TLTROs.