The European Central Bank (ECB) has announced a number of changes to its monetary policy instruments. The bottom line, however, is that it is sticking to a system of excess liquidity in the eurozone and continues to rely on the deposit rate as the most important interest rate in its monetary policy.

From 18 September, the gap between the deposit rate and the primary refinancing rate will fall from 50 to 15 basis points. The difference between the marginal lending facility and the main refinancing rate will remain at 25 basis points. The change is intended to increase the importance of weekly transactions in which banks can borrow money from the ECB at the main refinancing rate. By not adjusting until September, the ECB may want to prevent the change from being confused with an interest rate cut. The central bank is likely to have already initiated the interest rate turnaround by 18 September.

The upcoming turnaround in interest rates and the continuous reduction in the ECB's balance sheet total since 2022 were the reasons for a review of the monetary policy framework. Both of these factors are reducing liquidity in the eurozone. With the adjustments, the central bank wants to ensure that banks continue to have sufficient access to liquidity in the future while maintaining an effective monetary policy. „The framework ensures that the implementation of our monetary policy will continue to be effective, robust, flexible, and efficient against the backdrop of balance sheet normalisation“, said ECB President Christine Lagarde.

The ECB's adjustments also include new longer-term refinancing operations and a structural securities portfolio, both of which will be introduced at a later date. The central bank did not provide any details. For Thomas Gitzel, Chief Economist at VP Bank, a number of things can be deduced from this plan. „The ECB is already expecting to expand its balance sheet again in the future and that longer-term refinancing operations will play a central role in this", he said. "Furthermore, the statement that the deposit rate will remain the central key interest rate suggests that the balance sheet total will remain high.“

Commerzbank chief economist Jörg Krämer takes a similar view of the decisions. „On the positive side, the ECB wants to reduce excess liquidity", he said. However, it will basically stick to the system of excess liquidity with a high level of bonds. "It is therefore not creating any prospect of a gradual return to a system of scarce central bank liquidity, as prevailed until the outbreak of the financial market crisis.“

Before the financial crisis, the interbank market played a far more significant role than it does today. As central bank money was scarce, banks often had to borrow it from other financial institutions when needed. Therefore, they had to be more careful than today to ensure that they were creditworthy for other banks. Krämer misses this „salutary pressure“ from the market – and not just for financial institutions.

Krämer believes that the high government bond holdings of the ECB and the national central banks mean that eurozone countries have fewer incentives not to take on too much debt. The higher the bond holdings in the central banks' balance sheets, the less reliant the states are on fulfilling private investors' desire for sound public finances.

„Fifteen years after the end of the financial crisis, the ECB could have dared to show more normality“, Krämer concludes. The ECB has not gone back to the previous situation when it comes to minimum reserves for commercial banks, either. In the future, these will remain at 1% of customer deposits and no longer earn interest. Until the beginning of January 2012, they were still at 2%. A minority in the ECB Governing Council had argued in favour of an increase – to around 2% again.