A guide to the European Central Bank

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What is the European Central Bank?

The European Central Bank (ECB) is the central bank for the euro and the Eurozone. It’s responsible for administering monetary policy within the Eurozone.

All the central banks of each EU (European Union) member state own the bank’s stock. The ECB directly supervises 124 significant banks holding 82% of the Euro area’s banking assets.

The 27 European Union member states form one of the largest economic areas globally, and the 19 Eurozone countries are also a powerful economic force.

The Treaty of Amsterdam established the ECB in 1999, and it’s now one of the world’s most influential central banks. The ECB is one of seven European Union institutions enshrined in the Treaty on European Union.

Headquartered in Frankfurt, Germany, the current president of the ECB is Christine Lagarde.

What is the function of the European Central Bank (ECB)?

The primary function of the ECB, other than maintaining price stability, is formulating monetary policy. The ECB makes decisions over financial and economic objectives, interest rates, and the Eurosystem’s reserves supply.

The ECB Governing Council defines price stability (initially) as inflation of under (but remaining close to) 2% and that price stability helps to encourage economic growth and job creation.

The ECB has the monopoly for issuing banknotes in the Eurozone area. It controls the amount of money in the market by controlling currency supply available to EU member states’ central and commercial banks.

The ECB issues weekly announcements on the amount of monetary supply and the minimum interest rate. Eligible banks – those with collateral – place bids for the ECB funds through auctions, advanced as loans to businesses and individuals.

The ECB adheres to the protocol of the Eurosystem and the Single Supervisory Mechanism, here is a brief explanation of their functions.

  • Eurosystem: The Eurosystem comprises the ECB and member states’ central banks. The Eurosystem handles the practical implementation of ECB policy, such as holding and managing foreign reserves, implementing policy, operating in the foreign exchange market while ensuring the interbank payment system runs smoothly
  • Single Supervisory Mechanism (SSM): The ECB is the EU body responsible for banking supervision. It runs the Single Supervisory Mechanism (SSM) to ensure the European banking system’s safety and financial security. The SSM ensures consistent banking compliance and supervision practices across the EU member country banking systems. The SSM began functioning in November 2014 partly due to the Eurozone banking crisis starting in 2009. All the Eurozone area countries are in the SSM, and non-euro EU countries can choose to join

Structure of the ECB

Four decision-making ECB bodies undertake the objectives of the central bank. These bodies are the Governing Council, Executive Board, the General Council, and the Supervisory Board.

The Governing Council

The Governing Council has six members elected from the Executive Board and Governors of the national central banks of the Eurozone member states. The Council members meet twice each month at the offices in Frankfurt, Germany. The minutes of their meetings get published before the next meeting.

The council body creates monetary policy for the Euro area. They make decisions on interest rates, supply of reserves in the Eurosystem and overall monetary policy.

Every six weeks, the President and Vice-President of the ECB hold a press conference to explain the monetary policy decisions. The Governing Council also makes decisions about the performance of the ECB and the Eurosystem.

The Executive Board

The Executive Board consists of the President, Vice-President, and four other executive members appointed by the European Council.

The members serve for an eight-year term which does not get renewed. The Executive Board implements the Governing Council’s monetary policy, and it also manages the ECB’s day-to-day operations.

The board holds meetings every Tuesday and prepares the Governing Council meetings, and it carries out the Governing Council’s instructions.

The General Council

The General Council consists of the President, Vice-President, and Governors of the EU member states’ national central banks.

The body will continue to exist only until all EU member states have finally adopted the euro. As of 2021, 19 of the 28 EU member states have the euro as their single currency.

The General Council must fix the exchange rates of currencies for countries taking up the euro. The council contributes to the ECB annual report, and it collects data and sets employment conditions for European Central Bank staff.

The Supervisory Board

The Supervisory Board consists of the chair, vice-chair, four ECB representatives, and representatives of national supervisors. The board is responsible for planning and executing the functions of the ECB. It also proposes draft decisions for the Governing Council.

A Steering Committee supports the board’s activities, including the board’s meetings. The Steering Committee members include the Chair and Vice-Chair of the Supervisory Board, an ECB representative, and five national supervisors.

When does the ECB Governing Council meet?

The Governing Council typically meets twice a month at the ECB’s headquarters in Frankfurt, Germany. The council evaluates economic and monetary developments at both meetings and then publishes its monetary policy decisions every six weeks.

The council discusses other ECB issues and the Eurosystem’s other tasks and responsibilities at the other meetings.

To make sure there is a clear separation between the ECB’s monetary policy and its supervisory responsibilities, the Governing Council has separate meetings.

The ECB also publishes accounts of the Governing Council’s monetary policy meetings before the next meeting.

What are the current European Central Bank interest rates?

The ECB has three key interest rates, which get set every six weeks during the Governing Council’s monetary policy six-weekly meetings. The next meeting is on April 22, 2021.

The ECB Governing Council sets the following interest rates for the euro area:

  • The interest rate on the primary refinancing operations (MRO) supplies the bulk of liquidity to the banking system
  • The deposit facility rate. Banks use this to make overnight deposits with the Euro system
  • The marginal lending facility rate provides overnight credit to banks from the Euro system

The interest rate on the primary refinancing operation has been 0.00% since October 3, 2016. As of April 8, 2021, the interest rates were as follows:

  • Primary refinancing operations rate 0.00%
  • Deposit rate of -0.50%
  • Marginal lending facility rate of 0.25%

When is the next ECB interest rate announcement?

The Governing Council’s monetary policy meeting occurs every six weeks, with the next meeting scheduled for April 22, 2021.

The council’s decisions get announced through a press release at 1.45 pm CET on the day of the meeting, an ECB press conference then follows at 2.30 pm CET.

During this press conference, the ECB officials explain the rationale behind the council’s decisions. The euro’s value versus its peers can come under scrutiny during this conference when the reasons for interest rate settings get revealed.

ECB meetings and announcement calendar 2021

April 22 2021

Governing Council monetary policy meeting

April 22 2021

Press conference

May 12 2021

Governing Council non-monetary policy meeting

June 10 2021

Governing Council monetary policy meeting

June 10 2021

Press conference

June 23 2021

Governing Council non-monetary policy meeting

June 24 2021

General Council meeting

July 22 2021

Governing Council monetary policy meeting

July 22 2021

Press conference

September 9 2021

Governing Council monetary policy meeting

September 9 2021

Press conference

September 22 2021

Governing Council non-monetary policy meeting

September 23 2021

General Council meeting of the ECB

October 6 2021

Governing Council non-monetary policy meeting

October 28 2021

Governing Council monetary policy meeting

October 28 2021

Press conference

November 10 2021

Governing Council non-monetary policy meeting

December 1 2021

Governing Council non-monetary policy meeting

December 2 2021

General Council meeting

December 16 2021

Governing Council monetary policy meeting

December 16 2021

Press conference

How do ECB announcements impact traders and financial markets?

Traders and investors will monitor the impact of ECB policy decisions on securities such as currencies, stocks, indices and bonds. Traders might try to predict what monetary policy decisions get made before each meeting.

ECB announcements and policies affect the interest rates set by commercial banks and other lenders, which affects spending and inflation across the Eurozone.

Governing Council meetings are important dates in the economic calendar because the official interest rates for the Eurozone gets set. National central banks (NCBs) in the Eurosystem use these rates for transactions with commercial banks. The three key rates are:

  • The minimum bid rate, one-week loan rate
  • The deposit rate, the rate paid on deposits held with NCBs
  • The marginal lending rate, overnight loan rate

The Governing Council might adjust quantitative easing (QE) or bond-buying as they see necessary, processes that inject money into the economy to boost spending.

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The importance of ECB monetary policy for traders

Interest rate setting and quantitative easing/asset purchasing programmes have a significant impact on many financial markets. If the ECB lowers the primary interest, then the euro might fall in value.

Likewise, an increase in QE/asset purchasing will indicate a dovish, accommodating position by the bank, which could cause the euro to fall. Conversely, a tightening of the policy (a change to a hawkish outlook) might result in the euro’s price rising versus its peers.

Changes can also affect European equity markets. Interest rate hikes typically reduce stocks and bonds’ value but increase the euro’s value compared to other currencies.

The euro is the second most used currency in the Western Hemisphere, and EUR/USD is the most traded currency pair. Therefore, any notable change in policy by the ECB will affect the euro’s value.

The economic calendar lists several high impact events, and the ECB meetings and decisions rank as high impact news events. Traders look towards future monetary policy, and if they can predict both the policy decisions and market direction correctly, they can profit.

History of the ECB

The ECB was created in June 1998 by way of the Treaty of Amsterdam, which amended the Treaty on the European Union.

The ECB replaced the European Monetary Institute (EMI), formed at the second stage of the Economic and Monetary Union (EMU), created to cope with the euro’s adoption as the European Union’s common currency single currency of the Eurozone.

The ECB obtained complete control on January 1 1999, once the euro became the Euro area’s official currency. At this time, the national central banks of eleven EU member states transferred their monetary policy responsibility to the ECB.

Win Duisenberg, the former president of the EMI and the Dutch central bank, was the first ECB president. Duisenberg agreed to step down before his complete term, a French national, Trichet, then took over.

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