Two targets, one instrument : steering interest rates and preserving financial stability with Eurosystem credit operations

Abstract

At the height of the financial crisis some weeks after the collapse of Lehman Brothers, the Eurosystem adopted a full allotment policy in the refinancing of banks. The move from variable rate tenders and controlling the amounts of liquidity provided to the banks towards fixed interest rates was necessary when the financial intermediation capacity of the banking system had been paralysed and the traditional way implementing monetary policy had led to a significant increase in the price of central bank liquidity provision. This article examines how ensuring banks' access to liquidity through central bank operations has resulted in a situation where, for five years already, short-term money market rates have been lower than the interest rate on the main refinancing operations (MRO rate), that is, the Eurosystem's traditional key steering rate. The article discusses central banks' short-term challenges in the steering of interest rates and outlines a longer-term operational model that would enable the dual use of credit operations both for steering interest rates and, in parallel, for ensuring the availability of central bank funding. The model is based on a differentiated use of collateral in different types of operations conducted by the Eurosystem.