The role of the European Central Bank (ECB) is to maintain stability for the nineteen-nation Eurozone. They do this by controlling the supply of money within the European Union (EU) and by setting key interest rates.
Most countries have their own central bank, but the adoption of the Euro made it necessary to form the European Central Bank. The ECB was created in 1998 and serves as the central bank for the whole Eurozone.
It mainly manages Europe’s single currency by defining the monetary policy for all the countries within the Eurozone. The ECB also operates totally independent of all individual European governments.
Sometimes the ECB has taken radical steps to maintain stability like during the Eurozone’s sovereign debt crisis in 2009. Some of their unorthodox monetary policies included the following:
This move divided economists and policy makers and they still have questions over the future of the Euro currency.
The ECB’s main objective is to support the EU’s general economic policies while maintaining price stability. This translates into an increase of prices close to but under 2%.
Further, the ECB is tasked with making adjustments to the benchmark interest rate. Reducing the interest rate stimulates higher consumptions which also pushes prices to rise. At the opposite end, raising the interest rate reduces borrowing and prices.
The ECB also has the power to change the amount of currency that’s currently in circulation. The philosophy here is that excess currency can create inflation while an insufficient amount of currency can negatively impact economic growth.
The national central banks are still active, however, their role is to perform monetary policy operation within their own borders. So it’s the actual transactions function like supplying currency to commercial banks and manage foreign exchange reserves.
Depending on the country, they also mint coin currency and perform specific functions designated on a country-by-country basis.
So if you’re an investor trading in the Eurozone, you have to pay attention to the ECB. Whenever the ECB announces changes to monetary policy or interest rates, the effects can be felt throughout the EU. So whether it’s in bond markets or equity markets, the ECB will have a lot of influence.The bottom line is to follow the ECB like you would any central bank. If you know what decisions are forthcoming, you can adjust your investments accordingly.