Sergio Arboleda University

Erika Reyes

Omar Torres

Source: https://www.ecb.europa.eu

Delivery date: 04/07/2018

EUROPEAN CENTRAL BANK (ECB) AND ITS MONETARY POLICY

The European Central Bank (ECB) is the central bank of the 19 European Union
countries which have adopted the euro. The mission is to maintain price stability in
the euro area and so preserve the purchasing power of the single currency.

The European Central Bank is responsible for the prudential supervision of credit
institutions located in the euro area and in the participating Member States outside
the euro area. In this way, it contributes to the security and soundness of the
banking system and to the stability of the financial system in the EU and in each
participating Member State.

The European Central Bank is composed by The Governing Council this one main
decision-making body of the ECB. It consists of: The six members of the Executive
Board, plus the governors of the national central banks of the 19 euro area
countries.

The ECB and the national central banks of the euro area carries out a number of
functions to maintain price stability, like those:

a) Defining and implementing monetary policy

b) Conducting foreign exchange operations
c) Holding and managing the euro area’s foreign currency reserves
d) Promoting the smooth operation of payment systems

a. Defining and implementing monetary policy:

The primary objective of the ECB’s monetary policy is to maintain price stability.
The ECB aims at inflation rates of below, but close to, 2% over the medium term.
The ECB uses interest rates to affect financing conditions in the economy. By
steering financing conditions, the ECB can influence the overall level of activity in
the economy and can ensure that the inflation aim is met.

The Governing Council of the ECB sets three key interest rates:

1. The interest rate on the main refinancing operations. In these operations

banks can borrow liquidity from the Eurosystem against collateral on a
weekly basis, at a pre-determined interest rate.
2. The rate on the deposit facility, which banks may use to make overnight
deposits with the Eurosystem at a (pre-set) rate lower than the main
refinancing operations rate.
3. The rate on the marginal lending facility, which offers overnight credit to
banks from the Eurosystem at an interest rate (also pre-set) above the main
refinancing operations rate.

b. Conducting foreign exchange operations

The ECB carry out the following foreign exchange operations:

 Foreign exchange interventions

 Operations such as the sale of interest income derived from foreign reserve
assets and "commercial transactions"

c. Holding and managing the euro area’s foreign currency reserves

The ECB’s foreign reserves ensure that the ECB has sufficient liquidity to conduct
foreign exchange operations if needed. The objectives for the management of the
ECB’s foreign reserves are, in order of importance: liquidity, security and returns.

The ECB’s foreign reserves portfolio consists of US dollars, Japanese yen,

Chinese renminbi, gold and special drawing rights. The composition of the
reserves changes over time, reflecting changes in the market values of invested
assets, as well as the ECB’s foreign exchange and gold operations.
d. Promoting the smooth operation of payment systems

The ECB provides payment and securities settlement facilities, operating a large-
value payment system in euro, as well as a mechanism allowing the cross-border
use of collateral.

By other side, the ECB establishes oversight policies and corresponding standards
for large-value payment systems, retail payment systems and payment
instruments, clearing systems, securities settlement systems and certain third-party
service providers. It also establishes business continuity requirements for market
infrastructures and coordinates implementation work.

Also, the ECB monitors and, where necessary, develops a stance on market
developments and legal initiatives affecting the oversight of infrastructures and
arrangements for payments, clearing and securities settlement. And acts as a
catalyst for change, promoting efficiency in payment systems and, in the field of
retail payments, migration to the Single Euro Payments Area. It also promotes an
efficient securities market by fostering the harmonization of market standards and
encouraging the removal of barriers to integration.