Regulation on the prohibition on monetary financing - obligations and opportunities

The prohibition on monetary financing restricts the central bank financing of institutions within the public sectors of the EU and member states, thereby strengthening the budgetary discipline and the commitment to price stability as the primary objective of monetary policy. However, compliance with the prohibition does not mean that there is no leeway left for the efficient fulfilment of central bank functions. The exceptions specified in the law allow central banks to attain the objectives and fulfil the basic tasks of the European System of Central Banks. The regulations concerning the prohibition on monetary financing also apply to the non-euro area central banks - thus to the Magyar Nemzeti Bank as well - and compliance with such regulations is monitored by the European Central Bank. This article aims to provide a comprehensive overview of the key elements of the prohibition and the possibilities provided by the exceptions by presenting the central bank's lending practice, the purchase of debt instruments and the functions of the fiscal agent. The European Central Bank and member state central banks cannot grant credit to the public sector of the EU and of the member states. The central bank funding of publicly-owned credit institutions other than central bank money supply is irreconcilable with the prohibition on monetary financing. In respect of debt instruments, the purchase of securities issued by the public sector on the primary market is prohibited, and purchasing on the secondary market may not serve the circumvention of the prohibition either. Central banks may act as fiscal agents for the state; but any role they assume must comply with market conditions.