Liquidity conditions and monetary policy operations from 24 July to 22 October 2024

Prepared by Yannik Schneider and Kristian Tötterman

Published as part of the ECB Economic Bulletin, Issue 8/2024.

This box describes Eurosystem liquidity conditions and monetary policy operations during the fifth and sixth reserve maintenance periods of 2024. Together, these two maintenance periods ran from 24 July to 22 October 2024 (the “review period”).

Excess liquidity in the euro area banking system continued to decline during the review period. The fall in average excess liquidity was due to the maturing of the ninth operation under the third series of targeted longer-term refinancing operations (TLTRO III.9) on 25 September 2024 and to early repayments by banks of the tenth, and last, operation on the same day. Liquidity provision also diminished owing to lower holdings under the asset purchase programmes (APPs) following the discontinuation of APP reinvestments at the beginning of July 2023. Pandemic emergency purchasing programme (PEPP) holdings also began to decrease from the beginning of July 2024 given that principal payments from maturing securities are now only partially reinvested. The continuing decline in liquidity absorption through net autonomous factors partly offset the reduced liquidity provisioning, albeit at a slower pace compared with previous periods.

In line with its revised operational framework and as announced in March 2024, the ECB reduced the spread between the deposit facility rate (DFR) and the main refinancing operation (MRO) rate from 50 basis points to 15 basis points from 18 September 2024. The rate on the marginal lending facility (MLF) was also adjusted to keep the spread between the MLF and MRO rates unchanged at 25 basis points. Over the review period, the adjustments to the spread had no significant impact on banks’ participation in Eurosystem credit operations and overall activity in the money market. Furthermore, money market rates were not affected by the narrowing of the DFR-MRO spread at the beginning of the sixth reserve maintenance period of 2024. In the unsecured market, the euro short-term rate (€STR) decreased in parallel with the 25 basis-point policy rate changes. Repo rates also adjusted smoothly to these changes.

Liquidity needs

The average daily liquidity needs of the banking system, defined as the sum of net autonomous factors and reserve requirements, decreased by €21.9 billion to €1,462.1 billion over the review period. This reflected the fact that liquidity-absorbing autonomous factors increased less than liquidity-providing autonomous factors (Table A). Minimum reserve requirements edged up slightly by €0.9 billion to €162.5 billion, having only a marginal effect on the change in aggregate liquidity needs.

Liquidity-absorbing autonomous factors increased by €45 billion over the review period, owing mainly to a rise in other autonomous factors. On average, net other autonomous factors grew by €36.5 billion. This was primarily due to an increase of €49.1 billion in the revaluation accounts owing to higher gold prices, the liquidity impact of which was offset by correspondingly higher liquidity-providing net foreign asset holdings. Government deposits rose, marginally, by €0.7 billion to €118.4 billion. This marked a first pause in the continuous decline of government deposits since their peak of €655.2 billion in spring 2022. The overall decrease reflected the normalisation of cash buffers held by national treasuries, as well as remuneration changes for government deposits with the Eurosystem that made it financially more attractive to place funds in the market. The average value of banknotes in circulation increased by €7.8 billion over the review period to €1,562.7 billion. Banknote demand continues to be stable after peaking in July 2022.

Liquidity-providing autonomous factors rose by €67.7 billion, owing primarily to an increase in net foreign assets of €53.8 billion. This rise in net foreign asset holdings was driven almost entirely by an average increase in the value of gold reserves of €49.9 billion attributable to higher gold prices.^[1] Net assets denominated in euro grew by €13.9 billion over the review period, reflecting both a reduction in non-monetary policy deposits and an increase in non-monetary policy investments.

Liquidity provided through monetary policy instruments

The average amount of liquidity provided through monetary policy instruments decreased by €159.7 billion to €4,500.8 billion over the review period (Chart A). This decline in liquidity supply was driven primarily by a reduction in Eurosystem outright portfolios and, to a lesser extent, by repayments of Eurosystem credit operations.

The average amount of liquidity provided through credit operations fell by €57.7 billion to €76.4 billion over the review period. This decrease largely reflects the fall in outstanding TLTRO III amounts as a result of the maturing of the ninth operation under TLTRO III (€42.2 billion) together with early repayments of other TLTRO funds (€5.1 billion) on 25 September. The average outstanding amount of three-month longer-term refinancing operations (LTROs) increased by €2.0 billion, while the MRO stock recorded on the Eurosystem balance sheet rose by €1.0 billion. The relatively limited participation of banks in these regular operations and their ability to repay sizeable TLTRO funds without significant shifts to regular refinancing operations reflect banks’ comfortable liquidity positions in aggregate and the availability of alternative funding sources at attractive rates. Box 7 in this issue of the Economic Bulletin provides a detailed discussion of TLTRO repayments in general and the impact on bank lending conditions of the phase-out of these operations.

The average amount of liquidity provided through holdings of outright portfolios decreased by €102.1 billion to €4,424.4 billion over the review period. This decline was due to the discontinuation of reinvestments under the APP from 1 July 2023 and, to a lesser extent, to partial reinvestments under the PEPP since 1 July 2024.^[2],[3]

Chart A

Changes in daily liquidity provided through open market operations and excess liquidity

(EUR trillions)

Excess liquidity

Average excess liquidity decreased by €137.9 billion over the review period to stand at €3,038.6 billion (Chart A). Excess liquidity is the sum of the reserves that banks hold in excess of their minimum reserve requirements and of their recourse to the deposit facility net of their recourse to the MLF. 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, excess liquidity has steadily declined, falling to slightly below €3,000 billion towards the end of the review period.

Interest rate developments

Over the review period, the Governing Council twice reduced all three ECB policy rates, including the DFR (the rate through which it steers the monetary policy stance), by 25 basis points, and hence by an overall total of 50 basis points. The rates on the deposit facility, MROs and the MLF stood at 3.25%, 3.40% and 3.65% respectively at the end of the review period.

Together with the two reductions in the policy rates that came on top of the narrowing of the spread between the DFR and MRO rate, both the MRO and MLF rates had decreased by 85 basis points by the end of the review period. The narrowing of the DFR-MRO spread had no significant impact on banks’ take-up of refinancing operations and overall money market activity.

The average €STR reflected the cuts in the policy rates while maintaining a broadly stable spread with the DFR. On average, the €STR traded 8.3 basis points below the DFR over the review period, compared with an average of 9.0 basis points in the third and fourth maintenance periods of 2024. The pass-through of policy rate changes to unsecured money market rates was complete and immediate.

The average euro area repo rate, as measured by the RepoFunds Rate Euro index, continued to trade closer to the DFR. On average, the repo rate was 1.2 basis points below the DFR over the review period, compared with the average of 4.2 basis points in the third and fourth maintenance periods of 2024. This reflects the ongoing reversal of the factors that had exerted downward pressure on repo rates. This, in turn, led to repo rates rising as a result of factors such as higher net issuance since the beginning of the year, the release of mobilised collateral pledged against maturing/repaid TLTROs and the increased availability of public securities as a consequence of the decline in outstanding APP and PEPP holdings. The factors exerting upward pressure on repo rates also included greater demand from leveraged investors to finance long-positions in bonds. The policy rate changes were passed through smoothly to secured money market rates.