The European Central Bank (ECB)

The financial entity that is responsible for the establishment and governance of the monetary policy of the member countries of the EMU is the European Central Bank (ECB). Six members constitute the Executive board of ECB - a President, Vice President and additional four members.

The Governing Council consists of the governors of the national central banks in addition to the mentioned above individuals. The Executive Board is the entity that implements the monetary policies, whereas the Governing Council sets them. Meetings are held on a bi-weekly basis and decisions are taken by a majority vote. If there is a tie, the President has the casting vote.

Price stability and growth promotion are the major goals of the EMU in accordance to which monetary policy is set. In order to meet these goals, the monetary and fiscal policies are adjusted.

The Maastricht Treaty includes the criteria to which member countries should abide. In order to achieve the pre-determined goals (price stability and growth) these criteria should be followed. Heavy fines are charged to any member country that infringes these criteria.

The Maastricht criteria show that the ECB is very concerned about member states' inflation and deficit levels. Levels of below 2% in HCPI (Harmonized Consumer Price Index) and around 4.5% of Money Supply (M3) annual growth should be maintained by the countries part of the EMU.

The ECB and ESCB have a full autonomy regarding the setting and governance of monetary policy. These institutions are independent of the national governments of the member states as well as from the other institutions of the EU. The decision making autonomy of the ECB has been granted through Article 108 of the Maastricht Treaty. There, it is stated that members of the ECD decision making body should not be influenced in no way in their policies and should be instructed by neither the member states' governments nor other EU institutions.

In order to achieve price stability and growth, the ECB applies open market operations. In order to adjust interest rates, manage the liquidity of the currency and announce any monitory policy position, the ECB tends to apply several refinancing operations. These represent regular liquidity-providing reverse transactions. The latter have a maturity of two weeks and are implemented every week. These transactions provide the financial sector with large amounts of refinancing.

1. Longer-Term Refinancing Operations

   Through these operations, counterparties are provided with further longer-term refinancing. These transactions occur every month and mature in three months. They provide liquidity and are characterized as reverse.

2. Fine-Tuning Operations

   These operations are aimed at managing liquidity and steering interest rates. If there are any unexpected liquidity fluctuations, fine-tuning operations are applied in order to alleviate the impacts they may have on interest rates.

3. Structural Operations

   Structural operations are applied for the purposes of adjusting the structural position of the Eurosystem to the financial sector. Tools used include:

   • Reverse transactions
   • Debt certificates issuance
   • Outright transactions

The ECB repo rate represents the interest rate at which member states' central banks can borrow money from the ECB. It also represents the most important rate that the ECB aims to control. The meetings that are held every two weeks are directed toward the control of this rate. In order to prevent high inflation rates, the ECB tends to keep the repo rate at high levels. The value of the Euro is greatly influenced by the repo rate changes. 

Generally, exchange rates have an influence on the stability of prices. However, the ECB has not established an exchange rate target to keep up to. Instead it factors in exchange rates when they make any new policies. If the ECB has any concerns about rising inflation levels, it can intervene in the forex market in order to counteract them. Consequently, the value of the Euro is influenced by the comments made by the Governing Council and they are in the focus of attention by forex market traders.

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