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How are monetary policy decisions implemented?

Monetary policy

How is the euro area monetary policy implemented?

The Eurosystem has several tools at its disposal to implement monetary policy decisions.

Under normal conditions, the Governing Council sets the key interest rates, signalling the desired policy stance. The Eurosystem implements this decision by lending money to banks in exchange for guarantees or by accepting that banks deposit their money with the central bank. In technical terms, by providing or absorbing liquidity from the banking system at these interest rates.

To do this, the Eurosystem relies on:

  • Open market operations — by carrying out tender procedures to provide or absorb liquidity from banks. Tender procedures are executed by the national central banks;
  • Standing facilities — by offering two facilities that banks can use whenever they want: the deposit facility and the marginal lending facility. The facilities are managed by the national central banks;
  • Minimum reserves — banks have to hold a minimum amount of deposits with the national central bank. The amount is a small percentage of their customers’ deposits.

The Governing Council sometimes decides to take other measures, such as launching a financial asset purchase programme. The Eurosystem implements this decision by buying assets, for example from other investors (pension funds, banks or households).


What are the Banco de Portugal’s main responsibilities in implementing monetary policy?

The Banco de Portugal interacts directly with the banks (credit institutions) established in Portugal that may participate in monetary policy operations, known as “monetary policy counterparties”.

The Banco de Portugal’s main responsibilities are:

  • to assess whether institutions fulfil the criteria to be considered counterparties. Only then can they access monetary policy operations through the Banco de Portugal;
  • to execute monetary policy operations: conduct open market operations and manage the standing facilities;
  • to assess the guarantees (collateral) that institutions provide in monetary policy operations. The Eurosystem only provides liquidity if there are adequate and sufficient guarantees that it will recover the funds provided, so that its reputation and independence are safeguarded;
  • to monitor whether institutions comply with the minimum reserve requirements;
  • to forecast the domestic banking system’s liquidity needs on a daily basis;
  • to buy financial assets in the asset purchase programmes.