Liquidity conditions and monetary policy operations in the period from 3 May to 31 July 2018

Prepared by Dimitrios Rakitzis and Mª Carmen Castillo Lozoya

Published as part of the ECB Economic Bulletin, Issue 6/2018.

This box describes the ECB’s monetary policy operations during the third and fourth reserve maintenance periods of 2018, which ran from 3 May to 19 June 2018 and from 20 June to 31 July 2018 respectively. Throughout 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.

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 €1,427.5 billion, an increase of €64.5 billion compared with the previous review period (i.e. the first and second maintenance periods of 2018). This increase in liquidity needs was almost fully attributable to an increase in net autonomous factors, which on average rose by €64.4 billion to €1,303.3 billion during the review period, while minimum reserve requirements increased on average by less than €0.1 billion, amounting to €124.2 billion.

The growth in net autonomous factors, which implies absorption of liquidity, was a result of a decrease in liquidity-providing factors and an increase in liquidity-absorbing ones. The decline in liquidity-providing factors was in particular due to a decline in average net assets denominated in euro, which fell by €21.6 billion to €191.2 billion. This was mainly the result of higher Eurosystem liabilities to non‑euro area residents in euro, which increased on average by €12.8 billion in the period under review, thus providing a negative contribution to average net assets denominated in euro,^[1] and lower financial assets held by the Eurosystem for purposes other than monetary policy, which declined on average by €7.8 billion. On the liability side, the most relevant changes were driven by banknotes in circulation, which increased on average by €22.5 billion (reflecting to some extent seasonal patterns observed during the summer), and by government deposits, which increased on average by €11.9 billion to €239.4 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, with higher volatility being observed around the June 2018 quarter-end and other month-end dates during the period under review.

Liquidity provided through monetary policy instruments

The average amount of liquidity provided through open market operations – including both tender operations and APP purchases – increased by €71.3 billion to €3,291.1 billion (see Chart A). This increase was fully attributable to net APP purchases, while demand in tender operations decreased marginally.

The average amount of liquidity provided through tender operations declined slightly over the review period, by €8.6 billion to €753.2 billion. This decrease was primarily due to a lower average outstanding amount of targeted longer-term refinancing operations (TLTROs), which decreased by €8.4 billion. The decline in outstanding TLTRO funds was related to the settlement of the voluntary repayments of various TLTRO‑I operations and the first TLTRO‑II operation in June 2018, which amounted to a total of €14.5 billion. The average liquidity provided through MROs increased by €0.2 billion to €1.9 billion and the average amount of liquidity provided through three‑month longer‑term refinancing operations (LTROs) fell by €0.3 billion to €7.4 billion.

Liquidity provided through the Eurosystem’s monetary policy portfolios increased by €79.8 billion to €2,537.8 billion on average, on the back of ongoing net 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 €61.8 billion, €5.7 billion, €1.7 billion and €13.5 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 €2.9 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 review period, by €6.8 billion to €1,863.5 billion (see Chart A). The increase in liquidity through the APP purchases was almost entirely offset by an increase in net autonomous factors, mainly in the fourth maintenance period. In fact, while excess liquidity grew by €50.8 billion and net autonomous factors declined by €9.4 billion in the third maintenance period, these trends were reversed in the fourth maintenance period, with excess liquidity declining by €55.9 billion and net autonomous factors rising by €80.6 billion.

Regarding the allocation of excess liquidity holdings between current accounts and the deposit facility, average current account holdings grew by €27.3 billion to €1,331.9 billion, while average recourse to the deposit facility declined by a further €20.4 billion to €655.9 billion.

Interest rate developments

Overnight unsecured and secured money market rates remained close to the ECB 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 −0.363%, compared with an average of −0.364% in the previous review period. The EONIA fluctuated between a low of −0.371% around the weekend preceding Whit Monday (21 May 2018) and a high of −0.353% on the last day of June 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 −0.441% for the standard collateral basket, while the average overnight repo rate for the extended collateral basket was −0.394%.

The June 2018 quarter-end decline in repo rates for collateral from core euro-area countries was significantly milder than the decline at the end of the second quarter of 2017 and was widely perceived as a non-event. For example, at the end of June 2017 overnight GC repo rates for French collateral declined by 29 basis points to −0.75% and German collateral repo rates declined by 41 basis points to −0.90%. At the end of June 2018 the same repo rates declined by only 2 basis points and 5 basis points respectively, to −0.48% and −0.53%. This suggests that market participants have adopted more efficient practices for collateral management. Moreover, this development also suggests that the Eurosystem public sector purchase programme securities lending facility continued to support the smooth functioning of repo markets.