Slide 1

European Central Bank (ECB)

What is European Central Bank (ECB)?
The European Central Bank (ECB) is the central bank responsible for monetary policy
of those European Union (EU) member countries which have adopted the euro
currency. This region is known as the eurozone and currently comprises 19 members.
The principal goal of the ECB is to maintain price stability in the euro area, thus
helping preserve the purchasing power of the euro.
Slide 2
General information about ECB
The European Central Bank (ECB) is headquartered in Frankfurt am Main, Germany.
It has been responsible for monetary policy in the Euro area since January 1, 1999,
when the euro currency was first adopted by some EU members. The ECB Governing
Council is the body within the ECB that actually takes decisions on eurozone
monetary policy.
The Council consists of six executive board members and the governor (or equivalent)
of each member's national central bank. As membership of the Euro area has
expanded, so has the number of governors in the Governing Council. ECB has a
system of rotating voting rights among the national bank governors (the executive
board members have permanent voting rights), as the Governing Council is now too
large for all members to vote at each meeting.
How does the ECB work?
The ECB works with the national central banks of all EU countries. Together they
form the European System of Central Banks.
It leads cooperation between central banks in the eurozone. This is referred to as the
Eurosystem.
The work of the governing bodies
Governing Council – assesses economic and monetary developments, defines
eurozone monetary policy and fixes the interest rates at which commercial banks can
borrow from the ECB.
Executive Board – implements monetary policy, manages day-to-day operations,
prepares Governing Council meetings and exercises powers delegated to it by the
Governing Council.
General Council – contributes to advisory and coordination work and helps to
prepare for new countries joining the euro.
Slide 3
ECB's Structure
The European Central Bank was established in 1999. The governing council of the
ECB is the group that decides on changes to monetary policy. The council consists of
the six members of the executive board of the ECB, plus the governors of all the
national central banks from the 19 euro area countries. As a central bank, the ECB
does not like surprises. Therefore, whenever it plans on making a change to interest
rates, it will generally give the market ample notice of an impending move through
comments to the press. The governing council meets twice a month, but policy
decisions are generally only made at meetings where there is an accompanying press
conference, and those are held every six weeks.
There are four decision-making bodies of the ECB that are mandated to undertake the
objectives of the institution. These bodies include the Governing Council, Executive
Board, the General Council, and the Supervisory Board.
 
The Governing Council
The Governing Council comprises six members of the Executive Board and
Governors of the national central banks of the Euro area member states. The Council
members meet twice a month at the institution’s offices in Germany.  The minutes of
their meetings are required to be published prior to the next meeting. 
One of the primary functions of this body is the formulation of monetary policy for
the Euro area. In this regard, they make decisions on monetary objectives, interest
rates, and the supply of reserves in the Eurosystem. Every six weeks, the President
and Vice-President of the ECB must chair a press conference to explain in detail their
monetary policy decisions. The Governing Council also makes necessary decisions
that ensure the performance of the functions of ECB and the Eurosystem. 
 
The Executive Board
The Executive Board comprises the President, Vice-President, and four other
executive members appointed by the European Council. The executive members serve
for an eight-year non-renewable term. The role of the Executive Board is to
implement the monetary policy as defined by the Governing Council and manage the
day-to-day operations of the ECB, alongside the Chief Services Officer. 
Also, the board prepares the Governing Council meetings and exercises power
delegated to it by the Governing Council. It holds meetings every Tuesday. 
 
The General Council
The General Council is a transitional body that carries out responsibilities taken over
from the European Monetary Institute (EMI). It comprises the President, Vice-
President, and Governors of the national central banks of the EU member states. The
body will continue to exist until all EU member states have adopted the Euro. As of
2017, only 19 out of the 28 EU member states have taken up the Euro as their single
currency. 
As a transitional body, the General Council is tasked with fixing the exchange rates of
currencies for countries taking up the Euro. The council also contributes to the
preparation of the ECB annual report, setting conditions of employment for the
European Central Bank members of staff, and collecting data.
 
The Supervisory Board
The Supervisory Board comprises the chair, vice-chair, four ECB representatives, and
representatives of national supervisors. The board plans and executes the supervisory
function of the ECB. It also proposes draft decisions for the Governing Council
through the non-objection procedure.
There is a Steering Committee that supports the board’s activities, including
organizing the board’s meetings. The Steering Committee members comprise the
Chair and Vice-Chair of the Supervisory Board, One ECB representative, and five
representatives of national supervisors.

Slide 4
ECB's Mandate
The ECB's mandate is for price stability and sustainable growth. However, unlike the
Federal Reserve in the U.S., the ECB strives to maintain the annual inflation level
(growth in consumer prices) below 2%. As an export-dependent economy, the ECB
also has a vested interest in preventing against excess strength in its currency because
this poses a risk to its export market.
Slide 5
European Central Bank (ECB) Functions
The primary responsibility of the ECB, linked to its main goal of price stability, is
formulating monetary policy. This involves making decisions about monetary
objectives, key interest rates, the supply of reserves in the Euro-system and
establishing guidelines for implementing those decisions. Monetary policy decision
meetings are held every six weeks, and the ECB is transparent about the reasoning
behind its decisions. It holds a press conference after each such meeting, and later
publishes the minutes of the meeting.
The Euro-system comprises the ECB and the national member states' central banks.
The Euro-system is responsible for the practical implementation of ECB policy (such
as implementing policy, actually holding and managing foreign reserves, operating in
the foreign exchange market, and ensuring the payments system runs smoothly.)
The ECB is also the EU body responsible for banking supervision. In conjunction
with national central bank supervisors, it operates what is called the Single
Supervisory Mechanism (SSM). The decisions involved in this function are mainly
aimed at ensuring the safety and soundness of the European banking system. Part of
the rationale for the SSM is to ensure consistent banking supervision practices across
member country banking systems—lax supervision in some member countries had
been part of the cause of the European financial crisis that started in 2008. The SSM
began functioning in November 2014. All euro area countries are in the SSM and
non-euro EU countries can choose to join.

Conclusion The European Central Bank (ECB) manages the euro and frames
and implements EU economic & monetary policy. Its main aim is to keep
prices stable, thereby supporting economic growth and job creation.

NOTE: Single Supervisory Mechanism (SSM)

Slide 6
Primary objective
The primary objective of the ECB’s monetary policy is to maintain price stability.
This is the best contribution monetary policy can make to economic growth and job
creation.

The objective of price stability refers to the general level of prices in the economy and implies avoiding
both prolonged inflation and deflation. Price stability contributes in several ways to achieving high
levels of economic activity and employment:
 1. Price stability makes it easier for people to recognise changes in relative prices since such
changes are not obscured
by fluctuations in the overall price level. This enables firms and consumers to make better-
informed decisions on consumption and investment.This in turn allows the market to allocate
resources more efficiently. By helping the market to guide resources to where they can be
used most productively, price stability raises the productive potential of the economy.

2. If investors can be sure that prices will remain stable in the future, they will not demand an
“inflation risk premium” to compensate them for the risks associated with holding nominal
assets over the longer term. By reducing such risk premia in the real interest rate, monetary
policy can contribute to the allocative efficiency of the capital market and thus increases the
incentives to invest.This in turn fosters economic welfare.

3. The credible maintenance of price stability also makes it less likely that individuals and firms will
divert resources from productive uses to hedge against inflation. For example, in a high inflation
environment there is an incentive to stockpile real goods since they retain their value better than money
or some financial assets in such circumstances. However, stockpiling goods is not an efficient
investment decision, and therefore hinders economic growth.

4. Tax and welfare systems can create perverse incentives that distort economic behaviour. In most
cases, these distortions are exacerbated by inflation or deflation. Price stability eliminates the real
economic costs entailed when inflation exacerbates the distortionary impact of tax and social security
systems.

5. Maintaining social cohesion and stability: price stability prevents the considerable and arbitrary
redistribution
of wealth and income that arises in both inflationary and deflationary environments. An environment of
stable prices therefore helps to maintain social cohesion and stability. Several cases in the twentieth
century have shown that high rates of inflation or deflation tend to

create social and political instability.

What does monetary policy do?

Monetary policy operates by steering short-term interest rates, thereby influencing
economic developments, in order to maintain price stability for the euro area over the
medium term.
The ECB's monetary policy strategy
The ECB has adopted a specific strategy to ensure the successful conduct of monetary
policy. The ECB has defined price stability as a year-on-year increase in the
Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%. In the
pursuit of price stability, the ECB aims at maintaining inflation rates below, but close
to, 2% over the medium term.
The strategy also includes an analytical framework for the assessment of all relevant
information and analysis needed to take monetary policy decisions. This framework is
based on two pillars: economic analysis and monetary analysis.
Decisions
Monetary policy decisions are taken by the ECB's Governing Council. The Council
assesses economic and monetary developments and takes monetary policy decisions
every six weeks.
Implementation
To implement its monetary policy decisions, the Governing Council of the ECB has
adopted a set of monetary policy instruments and procedures as laid down in the
General documentation on Eurosystem monetary policy instruments and procedures.
Slide 7
Main elements of monetary policy
The ECB’s monetary policy strategy provides a comprehensive framework within
which decisions on the appropriate level of short-term interest rates are taken. It is
based on some general principles that aim to ensure a successful conduct of monetary
policy.
The ECB’s monetary policy strategy comprises
 a quantitative definition of price stability, and
 a two-pillar approach to the analysis of the risks to price stability.
The external communication of the strategy reflects the diversified approach to
monetary policy that the ECB has adopted for its internal decision-making.
Slide 8
Quantitative definition of price stability
The first element of the ECB’s strategy is a quantitative definition of price stability.
The ECB’s Governing Council has defined price stability as a year-on-year increase
in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.
Price stability is to be maintained over the medium term.
The Governing Council has clarified that, in the pursuit of price stability, it aims to
maintain inflation rates below, but close to, 2% over the medium term.
Two-pillar approach
In order to best serve its objective of maintaining price stability, the ECB, like any
other central bank, needs to thoroughly analyse economic developments.
The ECB's approach to organising, evaluating and cross-checking the information
relevant for assessing the risks to price stability is based on two analytical
perspectives, referred to as the "two pillars": economic analysis and monetary
analysis. They form the basis for the Governing Council's overall assessment of the
risks to price stability and its monetary policy decisions.