Majority of countries have their own central bank, which issues currency, defines monetary policy and ensures the proper functioning of the banking system. In Europe, however, adopting the Euro necessitated the creation of a European Central Bank (ECB).

In this article, we will explore the European Central Bank, an institution created to help implement the Euro that manages currency and manage economic crisis across the Eurozone.

EUROPEAN CENTRAL BANK

The European Central Bank (ECB) is one of the seven institutions of the EU and the central bank of the entire Eurozone. It is a consortium of European countries that uses the euro as its sole official currency.  It is one of the most critically important central banks in the world, supervising over 120 central and commercial banks in the member states.  The ECB is responsible for managing monetary policy and protecting the value of the euro. In comparison to the Eurozone economy, the ECB’s actions attract the attention of US traders as well as those of the Reserve Bank of the United States.

How ECB responses on Crisis time

Like the Fed, the ECB has responded to the COVID-19 pandemic by pledging to lend freely and stepping up its purchases of government debt.  Unlike the Fed, which had room to cut interest rates in response to the COVID-19 crisis, the ECB’s policy rate has been negative since 2014, when it was cut below zero to nudge banks to lend, rather than leaving deposits at the central bank. The deposit facility, the rate that banks receive for depositing at the ECB, is currently at minus 0.50 percent. But under a policy called ‘tiering,’ banks do not have to pay this penalty rate for a substantial proportion of their deposits. The ECB also controls two other short-term rates at which the banks can borrow from the ECB: the main refinancing operations and the marginal lending facility. These rates are largely irrelevant, however, as these facilities are rarely used today because the ECB has supplied liquidity in other ways.

Forward guidance. The ECB has offered forward guidance on the future path of its key interest rate, saying that they expect rates will remain “at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2 percent within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.” Such forward guidance on the overnight rate puts downward pressure on longer-term rates.

Conclusion

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 committee of the European central bank meets twice in a month to ensure smooth conduct and to formulate and discuss the plans for achieving the various objectives, which ensures the growth of the member countries.

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