Blog post by Stefan Gebauer, Thomas McGregor and Julian Schumacher | Central banks choose their words very carefully. And rightly so – policy makers’ wording can move markets and, eventually, the economy. This ECB Blog post shows how unexpected changes in communication influence growth and inflation.
Central banks need to communicate clearly. This helps the public understand the rationale behind monetary policy decisions and shape market expectations. Their statements sometimes provide explicit forward guidance on the future direction of monetary policy. These statements also reveal how decision-makers assess the economy, which in turn influences public expectations of how the central banks may react in the future. Can central bankers’ choice of words – the communication tone – influence the economy? In this blog, we show that the tone of ECB monetary policy communication indeed affects macroeconomic outcomes in the euro area.
 
Measuring the tone of communication
Our analysis is based on a central bank communication measure described in an earlier post. A natural language processing algorithm quantifies the tone of the Governing Council’s policy communication, specifically the ECB’s monetary policy statements (MPS) and press conference transcripts, which include journalists’ questions and the President’s answers. These texts are broken down into individual messages on specific topics, to which we assign numerical scores measuring their tone.
The algorithm is based on a set of dictionaries. First, the individual messages communicated during the press conference are categorised by topic distinguishing between monetary policy, the economic outlook, and inflation. Next, these messages are quantified both in terms of the direction and strength of the sentiment of the communication. For instance, the phrase “most measures of underlying inflation declined further” scores -1 (dovish), whereas a wording like “underlying inflation has fallen rapidly” would produce a score of -1.5 (even more dovish), with the index ranging from -2 to +2.
The resulting sentiment scores co-move closely with “hard” measures of related macroeconomic and financial variables (Chart 1). Changes in the inflation tone tend to lead changes in the 1y1y ILS forward rates – a common indicator for inflation expectations. Similarly, changes in the economic tone tend to lead GDP growth, suggesting that the sentiment contained in the ECB’s official communication is more than just a reflection of realised data. In addition, the tone of communication on monetary policy co-moves closely with market-based monetary policy expectations, as expressed in the 1y OIS rate. The exceptions here are during periods when the central bank applies forward guidance, as was the case for the ECB between July 2013 and mid-2022.
Chart 1
Co-movement of sentiment scores on inflation, the economy and monetary policy with macroeconomic data
(left hand scale in all panels: index; right hand scale in left and right panels: percentage points, right hand scale in middle panel: quarter on quarter percent change)

Sources: Refinitiv, Eurostat, and ECB calculations.
Notes: The charts show the evolution of the inflation, economic and monetary policy tone from the press conference transcripts following monetary policy decisions by the Governing Council (left hand axis) against the 1-year inflation linked swap (ILS) rate 1-year from now, the quarter-on-quarter GDP growth rate and the 1-year overnight indexed swap (OIS) rate (right hand scales).
Latest observations are 3 May 2024 for the 1-year ILS, 30 March 2024 for HDP and 11 April 2024 for the inflation and economic tone indices.
However, we cannot simply relate changes in the sentiment scores to future economic outcomes: causality can run in both directions. Changes in policy sentiment are affected by the Governing Council’s monetary policy decisions which are influenced by the economic outlook in the first place.
The monetary policy sentiment index measures the tone of central bank communication on monetary policy, with an increase in the index signalling a more “hawkish” tone and a decrease in the index signalling a more “dovish” tone. That causality can run both ways is also true here: We know that central bank communication typically follows economic data. Therefore, changes in the monetary policy tone could simply reflect a shift in communication caused by changes in economic conditions. In such a case, the updated communication should not come as a surprise to the public and should have little effect on the economic decisions taken by households and firms.
 
Identifying unexpected changes to communication
But the tone of communication can also offer new insights into the direction of monetary policy itself. What happens when changes in communication on monetary policy come as a surprise to the public? To answer this question, we construct a measure of the extent to which central bank communication contains surprises, i.e. changes in the policy tone that are independent of both current and expected macroeconomic conditions.
We use two steps to isolate what we call “monetary policy communication shocks” from the monetary policy communication tone that the public expects. The first step is to measure the extent to which changes in the monetary policy tone are driven by changes in the Eurosystem’s inflation and growth projections that were available at a given Governing Council meeting. We also check if changes in the output and inflation sentiment indices discussed above matter. What’s left over are changes in the monetary policy communication tone that are plausibly independent of the revelation of the Governing Council’s information about the economic outlook and inflation. One could think of nuances in the Governing Council’s interpretation of data, or of situations in which the Governing Council draws different policy conclusions from the data than the average observer.
Even these residual changes in the monetary policy tone may, however, already be anticipated by the public. This can happen, for example, if Governing Council members express their opinions on monetary policy in public between policy meetings, or if the public already internalises how the ECB adapts its language to data releases. The second step is, therefore, to restrict the communication surprises to those in which the financial market reaction shows a pattern that is in line with a monetary policy shock, as outlined in the work of Jarociński and Karadi (2020). For instance, a hawkish shift in the policy tone would need to coincide with a drop in stock prices to be classified as a hawkish policy communication shock. A dovish shift in communication would need to occur alongside a rise in stock prices to count as a dovish policy communication shock. For the intraday financial market reaction to Governing Council meetings, we use the database of Altavilla et al. (2019).
 
How communication shocks affect the economy
Having identified these monetary policy communication shocks, we then estimate their dynamic effects on output and prices using the local projection method (Jordà, 2005). We control for macroeconomic and financial variables and estimate the model for both standard monetary policy shocks as typically identified in the literature and policy communication shocks. Standard monetary policy shocks reflect any surprise in the actual decision on interest rates, rather than unexpected changes in the surrounding communication. For instance, if the Governing Council were to raise rates by 25 bps and the public expected only 10 bps, that would spell a standard interest rate shock of 15bps. We estimate the model on a monthly frequency for the period from January 2002 to February 2020. For the latest data points, we allow the forward horizons to capture the evolution of the dependent variable up to January 2024.
The results indicate that surprises in central bank communication significantly affect prices and real activity. A surprise hawkish shift in monetary policy communication (positive shock) leads to a significant and sizable decrease in inflation and economic activity. Chart 2 shows how output and prices respond to surprise changes in monetary policy-related communication and interest rates. The shocks are scaled to make “large” changes in communication and interest rates comparable, and we show the impact of the respective shocks on output and prices at different horizons.
We confirm the standard result that interest rates shocks have large impacts on the economy. In addition, we find that communications shocks matter too. Their effect is smaller, but still significant. Also, the main impact on the economy is reached later for communication shocks. For instance, we see real economic activity, measured as industrial production, decline by 2.3% two years after a hawkish communication shock. That effect compares to a decline of approximately 3.5% for an interest rate shock which is already playing out one year later. On inflation, a hawkish communication shock is associated with a 0.1 percent decline after two years; that compares to an almost 0.9 percent decline for an interest rate shock.
One reason for the delayed effects of communication shocks could be that observers need more time to internalise changes in central bank communication on monetary policy and to factor them into economic decision making. Changes in interest rates are directly observable and differences from market expectations are clear. A related question is whether communication shocks lead to changes in policy rates in the future. It turns out that futures markets for interest rates have a relatively muted response to our communication shocks, meaning that these shocks do not necessarily give a clear signal as to the future direction of policy rates.
Chart 2
Response of key macroeconomic variables to policy rate and communication shocks
(percentage change of output and inflation in response to tightening policy rate and communication shocks over the period Jan 2002 to Jan 2020).

Sources: Eurostat and ECB staff calculations.
Notes: Charts show the responses of industrial production and the HICP to both tightening policy rate and communication shocks, estimated using local projections (LP). The controls include: one lag of the respective response variable, the euro area unemployment rate, the ECB’s Composite Indicator of Systemic Stress (CISS) in financial markets, the commodity price index (all in log-levels), as well as the level of the economic outlook, inflation and monetary policy topic tone indicators, the 3-month OIS rate, a 10-year GDP-weighted synthetic sovereign bond yield, and the USD/EUR exchange rate. In each model, we control for the interest rate and communication shocks, respectively, as well as the “central bank information shocks” derived by Jarociński and Karadi (2020). All controls, except the response variables, enter the model contemporaneously. Finally, we add forward dummies (that enter at the t+h horizon) for the pandemic and the war in Ukraine. The pandemic period is defined as lasting from March 2020 to December 2021 while the war period is from March 2022 onwards. The policy rate shock, as well as the responses, are standardised such that a tightening communication shock results in a 25 bps increase in the 3-month overnight indexed swap (OIS) at peak. The units of the response variables are percentage changes. The communication shock is scaled such that it matches the size of the maximum absolute communication shock observed since the start of the COVID-19 pandemic. The maximum surprise change in the topic tone indicator was observed for the March 2022 meeting, where the continuation/acceleration of the APP rundown announcement possibly triggered a large hawkish surprise in communication.
Regression sample: Jan 2002 to Feb 2020.
Latest observation for the dependent variable taken up in forward regressions is Jan 2024.
Our finding that communication shocks are affecting macroeconomic outcomes imply that central banks need to communicate clearly and carefully weigh their messages to minimise the risk of unintended surprises. Since our results confirm that central bank communication can be a potent policy tool, it should be used in a measured way to avoid ad-hoc surprises.
The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.
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Abstract
Rising trade tensions, a spate of trade-inhibiting policy measures and a weakening of multilateral institutions have sparked a growing concern about the potential implications of global trade fragmentation. Yet, empirical evidence that geopolitical considerations are already materially affecting trade flows is scant. In this study, we quantify the impact of geopolitical tensions on trade of manufacturing goods over the period 2012-2022 in a structural gravity framework. To capture the influence of geopolitical tensions, we use a measure of geopolitical distance based on the UN General Assembly voting. The econometric analysis offers robust evidence that geopolitical distance has become a trade friction and its impact has steadily increased over time. Our results suggest that a 10% increase in geopolitical distance, like the observed increase in the US-China distance since 2018, is associated with a reduction in trade by about 2%. Our findings also highlight a differential and stronger impact on advanced economies and the emergence of friend-shoring.
Read entire paper here.
 
 
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Campaigning across Europe ahead of this year’s European elections was a reminder of what makes our Union what it is. Almost 500 million people with such disparate cultures, complex histories and differing perspectives all coming together at the same time to articulate their wish for an entire Union of 27 countries. In casting their vote they also help to build a shared European identity – all of this bound together by our rich and varied cultural tapestry. This is Europe’s greatest strength. It makes Europe more than a construct or a project. Europe is our home: unique in design and united in diversity.
From the record number of first-time voters to those who have voted in every European election, people expressed hopes and aspirations for a healthier and more prosperous future. But they also pointed to the fact that we are in an era of anxiety and uncertainty. Europeans have real doubts and concerns about the instabilities and insecurities we face – from the cost of living, housing and doing business to the way issues such as migration are handled. From our security at home to the wars in Ukraine and the Middle East. They also worry that Europe is often not fast enough; that it can be either too distant or too burdensome.
All of these expectations and concerns are real, legitimate and must be responded to. For that reason, I believe it is essential that the democratic centre in Europe holds. But if that centre is to hold it must live up to the scale of the concerns and the challenges that people face in their lives. Failure to do so would fuel resentment and polarisation and leave a fertile ground for those who peddle simplistic solutions but in reality want to destabilise our societies.
This is the backdrop to what is an era of profound change – for our society and our security, our planet and our economy. The speed of change can be destabilising and, for some, can lead to a sense of loss for the world as it used to be and a worry for the world as it will be.
All of this – coupled with the fallout from elections and events in a more contested world – has created a turbulent and potentially seismic period for Europe. The risks are real, the responsibilities serious.
Europe now faces a clear choice.
A choice to either face up to the uncertain world around us alone. Or to unite our societies and unite around our values.
A choice to be dependent, to let the divisions weaken us. Or to be bold in our ambition and sovereign in our action, working with our partners around the world.
A choice to ignore new realities or the speed of change. Or to be clear-eyed about the world and threats around us as they really are.
A choice to let the extremists and appeasers prevail. Or to ensure our democratic forces stay strong.
My view is that our era’s greatest challenges – from security to climate change to competitiveness – can only be solved through joint action. Our threats are too great to tackle individually. Our opportunities too big to grasp alone.
Against this backdrop, I believe Europe must choose its best option: Union.
This is based on a deep conviction that it is only Europe that can live up to our generational challenges in this unstable world – whether supporting Ukraine for as long as it takes, protecting our planet, ensuring social fairness, defending democracy, supporting livelihoods, industries and farmers, or leading on the tech breakthroughs that will shape the world for the rest of this century.
In the last five years, Europe has shown what it can achieve when it does it together. When it is fast and uses its size and power – as we did when securing vaccines for every Member State at the same time. When it is bold and ambitious – as we were with on the twin green and digital transitions and our recovery plan, NextGenerationEU. When it is united – as we have been in support of Ukraine, freedom and democracy at the darkest and most difficult of times.
It is time for Europe to step up collectively once again.
This is a shared responsibility for all European voters, but also for all those flying the European flag, from Kyiv to Chisinau, Tbilisi and across the Western Balkans – as well as those calling for a European future in the streets of towns and cities across our Union and continent. We must prepare for that future – by supporting all candidates in their merits-based journey to our Union, and by preparing our Union for the future with essential reforms.
The Union that we choose cannot be boiled down to a binary question of more or less Europe. For these times, we need a Union that is faster and simpler, more focused and more united, more supportive of people and companies. We need a Union that acts where it has added value and where we all mobilise together with a clear goal and a collective mission – EU institutions, national and regional governments, private sector, social partners, citizens and civil society.
We have achieved a lot together in the last five years, from the European Green Deal to NextGenerationEU, the Pact on Migration and Asylum and the implementation of the European Pillar of Social Rights. We must and will stay the course on all of our goals, including those set out in the European Green Deal.
Our focus must now be on implementing what we have agreed, working closely with all stakeholders and focusing on our big challenges. This is why I want to define a set of focused and collective objectives for 2030 and beyond, with clear targets and outcomes in these priority areas.
Defence and security. Sustainable prosperity and competitiveness. Democracy and social fairness. Leading in the world and delivering in Europe.
The Political Guidelines are our plan for European strength and unity. The priorities set out here draw on my consultations and on the common ideas discussed with the democratic forces in the European Parliament, and also on the European Council’s Strategic Agenda for 2024-2029. They are not an exhaustive work programme but aim to steer our common work.
The next five years will define Europe’s place in the world for the next five decades. It will decide whether we shape our own future or let it be shaped by events or by others.
In a world of adversity and uncertainty, I believe Europe must choose to stick together and dare to think and act big. To live up to the legacy of our past, to deliver for the present, and to prepare a stronger Union for the future.
This is the driving force behind these guidelines and all that I want to work on with the European Parliament and the Member States in the next five years.
 
Read entire statement here.
 
 
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Blog post by Svetla Daskalova, Federico Maria Ferrara, Pedro Formoso da Silva, Pamina Karl and Thomas Vlassopoulos | Repo markets are vital for banks to source liquidity and securities. They also represent an essential link in the monetary policy transmission chain. While the Eurosystem is in the process of reducing its market footprint, repo markets are going through a phase of change. The ECB Blog looks at dynamics in this market.
Monetary policy and repo markets are closely connected. The removal of monetary policy accommodation and the ongoing reduction of the Eurosystem’s footprint in financial markets set in motion some forces with countervailing effects on euro area repo markets. In this blog post, we identify these opposite forces and how they have influenced the dynamics in this market segment. In doing so, we take stock of the recent past to reflect on the growing importance of repo markets as a channel for liquidity redistribution, and outline the challenges for repo markets that lie ahead in this respect.
But first, what is a repo? “Repo” is short for “repurchase agreement”, which is a transaction where one market participant sells a security to another one, with an agreement to repurchase it later. Therefore, repos can offer a secured way to borrow and deposit cash for banks and other financial intermediaries, or a means to obtain a specific security. Moreover, repo markets are of critical importance for the smooth functioning of the government bond market, as they provide the financing for bond investments and help market participants source specific securities. Disruptions in repo markets can propagate to secondary government bond markets, affecting market liquidity and banks’ funding conditions. Thus, dysfunction in repo markets can have an adverse effect on the broader financial system and impede the smooth transmission of monetary policy.
How has the reduction of the Eurosystem’s footprint in government bond markets supported repo market functioning?
As repo markets play such a crucial role, it is worth checking how they have coped with the reduction of the Eurosystem’s footprint in euro area government bond markets.
Since 2022, the Eurosystem has made significant headway towards reducing its presence in government bond markets. The early repayments of the Targeted Longer-Term Refinancing Operations (TLTROs) in Q4 2022, after the decision to change their pricing, set this process in motion. With the repayments of more than EUR 2 trillion of outstanding TLTROs, almost 60% of the collateral previously mobilised with the Eurosystem in exchange for these funds has returned to the market. Especially in Q4 2022, significant volumes of government bonds that were previously tied up as collateral have made their way back into repo markets (collateral worth almost EUR 300 bn by now). After this initial phase, the amount of government bonds released has, however, remained stable, and other marketable but also non-marketable securities were demobilised instead (Chart 1, LHS).
This initial step of TLTRO repayments was followed by the decision to start a gradual run-off of the asset purchase portfolio (APP) in March 2023 and to reduce the holdings of the pandemic emergency purchase portfolio (PEPP) as of July 2024. These decisions made a significant contribution to shrinking the Eurosystem’s footprint in euro area government bond markets, which was further supported by an increase in net issuance (Chart 1, RHS).
Chart 1
LHS: Eurosystem collateral released since the TLTRO III repayments in November 2022 (LHS axis: EUR trillion; RHS axis: %) RHS: Contributors to the reduction in Eurosystem footprint in euro area government bond markets, November 2022 – June 2024 (%)

Sources: Eurosystem, CSDB, ECB calculations.Notes: The purple line in the LHS chart reports the ratio of released collateral to total credit repaid. The RHS chart displays the share of factors contributing to the reduction of the Eurosystem’s footprint in euro area government bond markets. It considers the change of total nominal amount of euro area government bonds outstanding, Eurosystem’s outright holdings and mobilised collateral since November 2022. Outright holdings are euro area government bonds held by the Eurosystem via purchase programmes, adjusted with euro area government bonds lent back via the Securities Lending against cash programme. Mobilised collateral includes euro area government bonds mobilised as collateral for open market operations.Latest observation: 30 June 2024.
Before the extensive scaling back of the Eurosystem’s market presence, repo markets experienced some difficulties. In 2022, the proper functioning of repo markets was hindered by the scarcity of high-quality assets like highly-rated government bonds.[2] This threatened to delay the transmission of monetary policy in the early stages of the tightening cycle. The improved availability of collateral since then has helped to significantly alleviate such shortages of assets and played a positive role in ensuring a much quicker alignment of repo rates to changes in policy rates.
Dynamics in government deposits and link to repo markets
In addition to the reduction of the Eurosystem’s presence in euro area government bond markets, some other balance sheet dynamics have also had a bearing on repo markets. A case in point was non-monetary policy deposits – i.e., deposits placed with the Eurosystem by euro area governments and official-sector entities outside the euro area. The negative interest rate environment had prompted an increase in such deposits since 2014.[3] During the COVID-19 pandemic, many euro area debt management offices also built large cash buffers to mitigate cash flow volatility and funding risk in view of the heightened macroeconomic uncertainty and the large fiscal commitments made. Non-monetary policy deposits reached more than €1,000 billion during the pandemic (Chart 2).
As long as the movements in and out of these deposits were gradual and smooth, their size was less of a concern. However, at the beginning of the Eurosystem’s path to monetary policy normalisation, when the policy rate moved back into positive territory, the zero-percent ceiling on non-monetary policy deposits risked catalysing abrupt and sizeable outflows from the Eurosystem’s accounts into euro area repo markets. Such concerns affected the pass-through of the ECB’s policy rate hikes to repo markets in September 2022.
Chart 2
Non-monetary policy deposits: government deposits and deposits of official-sector entities outside the euro area (EUR billion)
Source: Eurosystem.Notes: Temporary suspension of 0% ceiling for remuneration was announced on 8 September 2022 (green vertical line). New ceiling remuneration was announced on 7 Feb 2023 (black vertical line). New ceiling remuneration was implemented on 1 May 2023 (red vertical line).Latest observation: 30 June 2024.
In the face of potential adverse effects on market functioning, the Eurosystem took action to ensure the smooth transmission of monetary policy. First, in September 2022, the Governing Council decided to temporarily remove the interest rate ceiling of zero percent for the remuneration of government deposits held with the Eurosystem, which incentivised governments to keep liquidity on the Eurosystem’s accounts for longer. Later, in February 2023, the Governing Council announced a new ceiling for the remuneration of euro area government deposits, set at the €STR minus 20 basis points. The remuneration of deposits held by foreign central banks was also adjusted accordingly. These changes came into effect on 1 May 2023.[4]
The aim of these adjustments was to encourage a gradual and orderly reduction of non-monetary policy deposits, thus minimising the risk of potential adverse effects on market functioning. As a result, non-monetary policy deposits have been on a declining trend since the end of summer 2022, and there were no significant disruptions in repo markets triggered by these outflows (Chart 2).
Modest effects from changes in the remuneration of minimum reserves
The speed and extent of the rise in policy rates has been the hallmark of the process of departing from the ECB’s previously very accommodative stance. However, this rate increase, coupled with an abundance of remunerated reserves, prompted the need for the Governing Council to assess whether it could achieve the same outcomes in terms of policy stance and transmission at a reduced cost for the Eurosystem. The outcome of this assessment was the decision announced in July 2023 to stop remunerating minimum reserves as of September 2023.[5]
When taking this decision, the Governing Council was cognisant that one of the possible reactions to the change could be that banks would reduce the reserve base for minimum reserve calculations through balance sheet optimisation strategies. Instead of accepting unsecured deposits, they could switch to secured deposits or FX swaps – instruments that are not included in the calculation of the reserve base. Such strategies could exert pressures on money markets including repo markets, especially on the days when minimum reserve requirements (MRR) are calculated.
Chart 3
Month-end volumes of overnight transactions (LHS, EUR bn) and rate change (RHS, basis points) in secured money markets
Source: MMSR, ECB calculations.Notes: Averages refer to month-ends (excluding quarter-ends) and quarter-ends (excluding year-ends) over the period January 2022 to June 2023, i.e., before the remuneration of minimum reserve requirements (MRR) was reduced from deposit facility rate (DFR) to 0%. Repo volumes and rates refer to 1-day transactions of MMSR reporting agents’ cash borrowing volumes against all euro area government bond collateral.Latest observation: 30 June 2024.
So far, the minimum reserve reporting dates since July 2023 did see slightly higher volumes in repo markets compared to averages seen since 2022 (Chart 3, LHS). However, there was no noticeable price impact, in the context of the overall easing of collateral scarcity. Thus, any additional flows into the repo market were well absorbed (Chart 3, RHS) and the repo market impact of the change in minimum reserve remuneration has been modest.
Are repo markets at the cusp of a transformation?
Overall, we have witnessed an easing of asset scarcity and improved repo market functioning in 2023 and 2024. Yet, given the still high excess liquidity in the euro area, the nature of the repo market remains fundamentally unchanged for the time being, as it continues to be dominated by the intention to source collateral. Looking ahead, the challenge will be whether repo markets can successfully transition to a new paradigm in which they are an efficient and effective vehicle for distributing liquidity in the euro area. This is particularly pertinent as the Eurosystem dials down its presence in funding markets and excess liquidity is being reabsorbed.
Chart 4
Outstanding volumes of liquidity-motivated repo transactions (EUR billion)
Sources: ECB, SFTD, BrokerTec, Eurex, MTS, ECB calculations.Notes: Chart displays liquidity-motivated (general collateral, GC) repo volumes based on BrokerTec/MTS one-day repo transactions and on Eurex GC pooling trades as reported in Securities Financing Transactions Data (SFTD). Calculations are based on a single-counting approach.Latest observation: 30 June 2024.
Although it is still early days, there are some tentative signs that such a transformation of repo markets may already be underway. This is shown, for instance, by the considerable rise in activity of liquidity-motivated transactions on major European trading platforms (Chart 4), which went hand-in-hand with the reduction of excess liquidity in the system.
 
Conclusion
As the Eurosystem dials down its footprint, markets need to rise up to the challenge of providing viable and effective alternatives. For banks, this means preparing to tap multiple and alternative sources of liquidity, including some that have not been used for a long time. As a result, going forward, repo markets will have to prove their ability to efficiently redistribute liquidity to all corners of the financial system.

We are grateful to Benjamin Hartung, Katja Hettler, Annette Kamps, Benoit Nguyen, and Rita Fernandes Vitorino Besugo for their contribution to this blog post.
Several factors contributed to the scarcity of high-quality collateral in repo markets. First, the increase and volatility in yields of government bonds, amid the sharp repricing of interest rate expectations. This lowered government bonds’ value and simultaneously increased demand for these high-quality assets in repo markets. Second, the substantial holdings of government bonds of the Eurosystem reduced the amount of high-quality assets available to market participants.
Until September 2022 the relevant legal framework foresaw a remuneration ceiling for non-monetary policy deposits of zero percent if the deposit facility rate (DFR) was zero percent or higher. In the presence of a negative DFR, however, their remuneration was linked either to DFR or to €STR and, therefore, was more attractive compared to the situation under positive rates.
Following a comprehensive review of the remuneration of the different types of non-monetary policy deposits, the Eurosystem confirmed on 16 April 2024 the remuneration ceiling for euro area government deposits and most other non-monetary policy deposits.
In October 2022 the Governing Council decided to reduce the remuneration of minimum reserves from the rate on the Main Refinancing Operations (MRO) to the Deposit Facility Rate (DFR), while leaving the actual minimum reserves’ ratio unchanged at 1%.

 
 
Compliments of the European Central BankThe post ECB | Repo markets: Understanding the effects of a declining Eurosystem market footprint first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.