The Eurosystem’s monetary policy measures in the years following the European sovereign debt crisis were shaped, in particular, by a prolonged period in which inflation rates were well below the Eurosystem’s target. Against this backdrop, the ECB Governing Council decided, starting in 2014, to conduct various targeted longer-term refinancing operations (TLTROs) and launch temporary monetary policy purchase programmes in addition to the existing operational framework.

To support bank lending to the euro area non-financial sector, the Eurosystem conducted a total of three series of TLTROs. In these series, participating banks were required to meet certain lending requirements in order to be able to participate in the operations or to benefit from particularly favourable conditions. The first series was adopted in June 2014 and comprised eight operations maturing in September 2018. In order to further stimulate lending, in March 2016 a second series was adopted with a total of four operations, each with a four-year maturity. One year later, the ECB Governing Council adopted a third TLTRO series with seven operations, the terms and conditions of which were adjusted in response to the spread of COVID-19, and three more operations were added on 10 December 2020. The outstanding volume of TLTROs peaked at over €2,000 billion with the third series, which equated to around 15% of euro area GDP.

In order to return inflation from a very low level to rates close to target, the Eurosystem also introduced a negative deposit facility rate for the first time in June 2014. This was intended to result in a further sustained reduction in the general interest rate level and thus, in particular, revive demand for bank loans from the non-financial sector.

In addition, in October 2014 the ECB Governing Council decided to purchase covered bonds (third covered bond purchase programme – CBPP3) commencing in October 2014 and asset-backed securities (asset-backed securities purchase programme – ABSPP) commencing in November 2014. By decision in January 2015 (with purchases starting in March 2015) purchases were expanded in order to include bonds issued by euro area central governments, agencies and European institutions located in the euro area (public sector purchase programme – PSPP) and merged into an expanded asset purchase programme (APP). Furthermore, in March 2016 the ECB Governing Council decided to further expand the APP to include a corporate sector purchase programme (CSPP) starting in June 2016. Net purchases were adjusted regularly and were temporarily discontinued altogether between January and October 2019. In the summer of 2022, the securities held for monetary policy purposes amounted to almost €5,000 billion, or almost 40% of euro area GDP. As of July 2022, net purchases under the APP were discontinued and, as of July 2023, reinvestments of principal payments from maturing securities under the APP were discontinued altogether in order to reduce the APP portfolio at a measured and predictable pace.

The above-mentioned purchase programmes aimed to lower long-term interest rates, thereby stimulating lending and, subsequently, inflation. In the course of this quantitative easing, in particular through the PSPP, the Eurosystem provided so much liquidity that traditional open market operations, such as the weekly main refinancing operations, became less important. Together with the TLTROs, this significant increase in excess liquidity led to short-term interest rates falling below the deposit facility rate, meaning that the established corridor system acted de facto as a floor system.

In a floor system, the deposit facility rate is the main reference rate for monetary policy. Due to the huge amount of excess liquidity in the banking system, banks have no need to obtain central bank liquidity from other banks or raise additional liquidity (borrowing is associated with additional balance sheet costs, such as the cost of equity). As a result, money market rates fall and converge on the deposit facility rate. Due to the narrow spread between the money market and deposit facility rates, banks prefer to deposit excess liquidity with the central bank. The interbank market becomes inactive. The remaining transactions in the money market then largely take place between non-banks, which do not have access to the deposit facility, and banks. The former accept a lower interest rate than the deposit facility rate because they have no way of receiving the Eurosystem’s deposit facility rate. Money market rates subsequently fall below the deposit facility rate.

Moving to a de facto floor system enabled the Eurosystem to retain control over short-term interest rates and pursue its monetary policy objectives in spite of the high level of excess liquidity in the banking system. The combination of purchase programmes, TLTROs and negative interest rates served to ease monetary policy, thereby contributing to the sustained convergence of inflation with the Eurosystem’s target.

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