Non-standard monetary policy measures to improve the financing of the economy

To counter the effects of the financial crisis, from 2008 onwards central banks began to implement exceptional measures that went beyond “standard” monetary policy. After already cutting key interest rates to very low levels, they devised new methods aimed at improving financing conditions in the real economy. We refer to these as “non-standard” measures and they may take several forms:

The adoption of negative interest rates   

The ECB's deposit facility rate moved into negative territory in June 2014 and remained there until the summer of 2022. Consequently, prevailing interest rate benchmarks on the money market fell significantly below zero, reinforcing the accommodative nature of monetary policy with the aim of getting back to the inflation target.

Forward guidance     

Using a signal effect by adopting forward guidance consists of providing indications to the markets about the future path of key interest rates. The ECB used forward guidance for the first time in July 2013.

Targeted longer-term refinancing operations (TLTROs)

Targeted longer-term refinancing operations involve providing long-term financing to the banking sector on attractive terms in order to safeguard borrowing conditions in the sector and stimulate bank lending to the real economy. The ECB has set up several targeted longer-term refinancing operations (TLTROs) since 2014.

Quantitative easing

Quantitative easing is a form of non-standard monetary policy where central banks intervene massively and over a prolonged period in financial markets by buying large quantities of financial assets from the banks. By buying these securities from banks, central banks increase the quantity of liquidity in circulation and force interest rates down, thereby indirectly countering the risk of deflation and a slowdown in growth.

The asset purchase programme (APP), the ECB’s first quantitative easing programme

The ECB launched its first quantitative easing programme, the APP (asset purchase programme), in March 2015 to support monetary policy transmission mechanisms and provide the flexibility needed to ensure price stability. The APP includes:

• Two pre-existing programmes: the ABSPP (asset-backed securities purchase programme) and the CBPP3 (covered bond purchase programme 3), launched at the end of 2014, both of which help banks to diversify their sources of financing, develop their new security issuance programmes and make loans more widely available.
• Two new programmes: the PSPP (public sector purchase programme), launched in March 2015, involving the purchase of bonds from public issuers (governments, agencies, supranational institutions); and the CSPP (corporate sector purchase programme), launched in June 2016 and consisting of the purchase of bonds and commercial papers from non-financial corporations.

Since the programme was set up, and excluding the period when net asset purchases were halted, between €15 billion and €80 billion worth of assets have been purchased every month.

The PEPP purchase programme: a response to the public health crisis

In response to the health crisis, the ECB's Governing Council set up an emergency purchase programme in March 2020 – the pandemic emergency purchase programme (PEPP) – to mitigate the serious risks to monetary policy transmission mechanisms and to the euro area's economic outlook arising from the coronavirus epidemic (Covid-19).

The assets eligible for the APP programme are also eligible for the PEPP programme, together with Greek sovereign securities and commercial papers with residual maturities of at least 70 days.

The programme's initial envelope of €750 billion has been gradually increased to €1,850 billion.

New monetary policy decisions to tackle inflation

With progress in terms of economic recovery and increasing inflationary pressures, the ECB's Governing Council decided:

• at its meeting in December 2021, to discontinue net asset purchases under the PEPP at the end of March 2022, and to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024
• at its meeting in June 2022, to discontinue net asset purchases under the APP from 1 July 2022
• at its meeting in December 2022, to begin the process of normalising its balance sheet (i.e. quantitative tightening), by confirming an average monthly reduction of €15 billion in the reinvestment of the principal payments from maturing securities under the APP programme over the period between March and June 2023

The Transmission Protection Instrument, for more effective transmission of monetary policy

To ensure the effective transmission of monetary policy during the normalisation process, at its meeting in July 2022, the Governing Council created the Transmission Protection Instrument (TPI). This is a purchase programme that may be activated in the event of unwarranted and disorderly market dynamics that pose a serious threat to the transmission of monetary policy within the euro area. If the TPI is activated, unlike purchases made under the APP programme, purchases must not have a permanent impact on the Eurosystem balance sheet, and therefore on monetary policy stance.

Securities lending programme

Securities from public issuers purchased under the PSPP and PEPP programmes and securities purchased under the CSPP programme are subject to a securities lending facility to improve market liquidity, especially when there is a collateral shortage. This lending may take place:

• against securities, offset by a reverse repo transaction of the same maturity
• against cash, up to an overall limit of €250 billion for the entire Eurosystem