The implementation of monetary policy and emergency liquidity assistance

The role of the Bank of Italy

The Bank of Italy contributes to the formulation of monetary policy for the euro area through the Governor's participation in the Governing Council of the European Central Bank (ECB). The Governor acts in full autonomy and independence, contributing to monetary policy decisions also based on the preparatory activities of the committees and working groups set up within the Eurosystem, which include representatives from the Bank of Italy.

Under the principles of operational decentralization and subsidiarity established at European level, the Bank of Italy is responsible for the implementation of monetary policy, together with the other national central banks: it conducts monetary policy operations on behalf of the Eurosystem in Italy, manages relations with banks operating in Italy and verifies the adequacy of the collateral pledged to back loans.

The Bank of Italy is also responsible for emergency liquidity assistance (ELA).

More details on the Bank's activities can be found in 'The Bank of Italy. Tasks and Objectives' (only in Italian) and the Report on Operations and Activities of the Bank of Italy.

The Eurosystem's objective and its strategy

The primary objective of the Eurosystem is to maintain price stability, as laid down in Article 127 of the Treaty on the Functioning of the European Union (TFEU). Price stability is essential to support the overall policies of the European Union, which are designed to achieve balanced economic growth aiming for full employment and, more broadly, the well-being of individuals.

The Governing Council adopted an operational definition of price stability that aims for a level of inflation in the euro area, as measured by a'harmonized' index of consumer prices for goods and services, of 2 per cent over the medium term. This definition, adopted in 2021 following the monetary policy strategy review, makes the Eurosystem's action transparent and enhances its credibility, providing a solid anchoring of inflation expectations.

Instruments and operational framework

Monetary policy is conducted by setting the key Eurosystem interest rates and by regulating central bank liquidity (see the section 'Bank reserves in the Eurosystem'). Central bank liquidity is made available to the banking system that features a structural liquidity deficit arising from reserve requirements and autonomous factors, which include the demand for banknotes by the public. In this way, the central bank steers money market interest rates, thereby influencing the rates applied by banks to firms and households on deposits and loans.

The Eurosystem's key interest rates comprise the rate on the deposit facility, the interest rate on the main refinancing operations, and the rate on the marginal lending facility. The rate on the deposit facility is the rate through which the Governing Council steers its monetary policy stance.

Central bank liquidity is made available to the banking system by means of a set of instruments which, together with the Eurosystem-wide rules and procedures for monetary policy implementation, constitute what is known as the operational framework. The instruments can be divided into three categories: open market operations, standing facilities, and minimum reserve requirements. From a technical standpoint, they can take the form of credit operations (or refinancing operations), deposits, or outright purchases/sales of financial assets (see the 'Eurosystem public and private sector securities purchase programmes' web page). Deposit and credit (or refinancing) operations are conducted by the Bank of Italy with the credit institutions operating in Italy that fulfil the eligibility criteria (see the section 'Monetary policy counterparties'). Credit operations are conducted against adequate collateral (see the section 'Collateral management').

In a context of gradually declining liquidity in the banking system, in March 2024, the ECB announced a number of guiding principles and changes to the operational framework for the implementation of monetary policy. These changes ensure that the operational framework can continue to steer short-term money market rates closely in line with the Governing Council's monetary policy decisions.