Philip R. Lane: Euro liquidity lines and the international monetary system

Remarks by Philip R. Lane, Member of the Executive Board of the ECB, at the CF40-Euro50 luncheon “Monetary System Beyond the Dollar”

The provision of liquidity is a basic task for a central bank.[1]

The ECB injects liquidity through its refinancing operations (currently the main refinancing operations and the longer-term refinancing operations, with very long-term refinancing operations and targeted longer-term refinancing operations deployed in the past) and asset portfolios (previously built up under the asset purchase programme and the pandemic emergency purchase programme).[2]

Since the ECB only has domestic counterparties in its refinancing operations, it is essential to complement the domestic liquidity framework with international liquidity lines. These lines, which consist of both repo and swap lines, mitigate adverse spillovers in the event of increased demand for euro liquidity abroad and/or impairment in cross-border euro liquidity flows. In the absence of international liquidity provision, such shocks might exert upward pressure on euro money market rates or disrupt the functioning of securities markets and the banking system, and thereby impair monetary policy transmission.

In recent years, the world economy has undergone profound structural shifts related to geopolitics and changes in the international financial system. These shifts have altered the dynamics of global trade and financial integration and suggest that the macroeconomic and financial environment will remain uncertain and potentially more volatile. More frequent financial disruptions and possible knock-on effects on euro area financial markets have the potential to hamper the smooth transmission of monetary policy.