European Central Bank (ECB)

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European Central Bank (ECB)

Key takeaways

  • The ECB is the central bank for eurozone countries and is responsible for euro-area monetary policy.
  • Its primary mandate is price stability, targeting 2% inflation over the medium term on a symmetrical basis.
  • Monetary policy decisions are made by the Governing Council; voting rotates among national central bank governors alongside the Executive Board.
  • The ECB oversees the Eurosystem (ECB + euro-area central banks) and leads Europe’s Single Supervisory Mechanism for bank supervision.

What the ECB is

The European Central Bank (ECB) is the central bank for countries that have adopted the euro. Headquartered in Frankfurt, it has managed euro-area monetary policy since the euro’s introduction. Its core objective is to maintain price stability across the eurozone.

Structure and decision-making

  • Governing Council: The ECB’s main decision-making body for monetary policy, comprising the six members of the ECB Executive Board plus the governors of the national central banks of euro-area countries.
  • Voting rotation: Because the number of national governors exceeds the number of available voting slots, a rotation system determines which governors vote in any given meeting. Larger economies participate in the rotation more frequently.
  • Executive Board: Responsible for implementing Governing Council decisions and managing day-to-day operations.

Mandate

The ECB’s primary mandate is price stability. It aims for an inflation rate of 2% over the medium term. The target is symmetrical, meaning deviations above or below 2% are treated as equally undesirable. The 2% objective serves as a buffer against deflation and helps anchor inflation expectations.

Main functions

  1. Monetary policy
  2. Sets key interest rates and guides the supply of euros in the economy.

  3. Holds monetary policy meetings roughly every six weeks, followed by a press conference and published minutes to explain decisions and rationale.

  4. Eurosystem management

  5. The Eurosystem consists of the ECB and the national central banks of euro-area countries and is responsible for issuing and managing the euro and implementing monetary policy across the currency area.

  6. The European System of Central Banks (ESCB) includes the ECB plus the central banks of all EU member states, including those that have not adopted the euro.

  7. Banking supervision

  8. The ECB is the central authority of the Single Supervisory Mechanism (SSM), which works with national supervisors to ensure the safety and soundness of banks in the euro area.
  9. The SSM enforces consistent supervisory standards across member banks to reduce risks arising from uneven supervision. It began operations in 2014. All euro-area countries participate; non-euro EU countries may opt in.

Summary

The ECB is the eurozone’s central bank, responsible for maintaining price stability through monetary policy, managing the euro with national central banks, and supervising the banking system via the SSM. Its governance combines an executive board with national central bank governors, using a rotation system to manage voting as the currency union has expanded.