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    European Central Bank Meeting

    What is the European Central Bank Meeting?

    The European Central Bank (ECB) meeting is known as the Governing Council’s monetary policy meeting which is held every six weeks. Decisions regarding monetary policies and interest rates are made at the meeting, and changes tend to have a major impact on the world’s most popular currency pair: the EURUSD, which is the Euro vs. USD exchange rate. Other Euro dominated pairs such as EURGBP, and EURCAD, EURAUD, tend to see large price swings on the day of the ECB rate meeting.

    For the ECB the main objective is to maintain stable prices (inflation) for the countries that use the Euro. Decisions made by the council are announced on the day of the meeting at 12.45pm CET, this is done through a press release. Following this, there is a press conference on the day of the meeting, allowing the media to ask questions.

     

    European Central Bank Location - Where is the ECB Located?

    The European Central Bank was founded in 1998 and is an official institution of the European Union. It is currently situated in Frankfurt am Main in Germany. German_Frankfurt_map

     

     

     

     

    When is the next ECB Rate Meeting?

    • June 06, 2019

    • July 25, 2019

    • September 12, 2019

    • October 24, 2019

    • December 12, 2019


    Why is the ECB important?

    Traders and investors try to predict which way monetary policy will go and if they are correct, their portfolios could gain substantially. If the interest rate goes up aggressively over a short period of time traders can expect this to cause a ripple effect making the value of their stocks, bonds, and other securities decrease. It tends, however, to increase the value of the Euro in relation to other currencies. On the other hand, lower interest rates could have the opposite effect. To predict future monetary policies, traders examine the formation of the Governing Council, the distributions of voting rights between countries, and look at economic factors such as economic growth and inflation, and political decisions as Brexit.

     

    How does the ECB meeting affect the markets?

    The aim of the ECB meeting is to set an inflation rate across the EU area of just under 2%. The meetings are highly significant for traders as it determines the official interest rates for the eurozone. Once the rates have been set, the national central banks (NCBs) are required by the ECB to use the rates for transactions with commercial banks.

    There are key rates which are set, these include the minimum bid rate, the deposit rate, and the marginal lending rate.

    The minimum bid rate is the rate set for one-week loans only.

    Deposit rates are the rates paid on deposits that have been held with NCBs.

    The marginal lending rate is only for overnight loans.

    The Governing Council also could apply something called quantitative easing (QE) when it is required. QE involves putting money into the economy to boost and encourage spending. The policies set by the ECB influences the interest rates set by commercial banks and other lenders. Therefore traders and investors are likely to be concerned about the impact the ECB policy will have on the demand for stocks and other securities. This may cause traders to change their strategies. It is common for traders to predict which way monetary policy will be heading, prior to each meeting.

     

    How does the ECB impact the forex market?

    Traders look for language that is either Hawkish or Dovish to determine whether the ECB will either increase or decrease the rates. They will look for clues in the language used by the chairman of the ECB, and other members, outside of the meetings, these clues can be referred to as ‘forward guidance’.

    Hawkish

    The term Hawkish is used if central bankers are talking about tightening monetary policy. The policy is tightened by increasing interest rates or even reducing the ECB’s bank’s balance sheet.

    Central bankers tend to be hawkish if the economic outlook is positive and if inflation is expected to rise. Words that could be used to describe a hawkish monetary policy may include:

    strong economic growth, reducing the balance sheet, interest rate hikes, etc. If the central bank’s monetary policy is turning hawkish then the currency could appreciate.

    Dovish

    If Central bankers are talking about reducing interest rates or even introducing quantitative easing (injecting money into the economy) then they are said to be dovish. Some words that could be used to describe a dovish monetary policy include weak economic growth, inflation decreasing, increasing the balance sheet, and interest rate cuts. If it is a dovish monetary policy then the currency could depreciate.

    Therefore if traders think that the ECB will commence on an interest rate hiking cycle then they will trade in favour of that particular currency. Whereas if traders believe that the ECB will take a dovish stance, they will then look to go short on the currency. Opportunities are also presented to trade based on the interest rate differential between two countries’ currencies, this is done via a carry trade.

    Why is the ECB independent?

    The independence of the ECB is significant in order to maintain price stability. There has been a clear trend which has led central banks to separate monetary policy from direct political influence, as they haven’t always been independent bodies. The danger with governments having control over central banks is that politicians may be tempted to change interest rates in order to benefit from short term economic booms. This then could damage the economy in the long run.

    A closer look at the ECB rate decisions

    The way inflation is controlled by the Governing Council is by changing the key European interest rates.

    The minimum bid rate: This is the rate the NCBs must charge for one-week loans. There are two names for this, the main refinancing rate or ECB refi rate. Commercial banks use the minimum rate as it is the lowest rate on which they can borrow capital. The rate also has a significant influence on the interest rates charged by commercial banks to businesses and consumers.

    Deposit Rate: This is the amount of interest which is paid on overnight deposits that are made with NCBs in the Eurosystem. If the deposit rate is increased this means that commercial banks will get a better return on money deposited with the NCBs. Therefore commercial banks can give fewer overnight loans to other commercial banks. If the deposit rate goes down, then banks will get a lower return than the amount they deposited with the NCBs. Commercial banks will then want to provide more overnight loans and deposit less money. The deposit rate is another way the Governing council controls the cash flow into the economy.

    Marginal lending rate: This lending rate, is the rate which NCBS must follow to charge commercial banks for overnight loans. These loans are used by banks to ensure that they have enough cash for clients, this is so that the loan will meet the bank’s reserve requirements for the day. Therefore the ECB will set this rate so that its higher than the minimum bid rate, this is seen as a penalty for banks   that have to borrow emergency funds to meet their reserve requirements. The penalty is greater when there is a wider gap between the marginal lending rate and deposit rate. The gap can also be called the corridor. This affects the way conservative banks are with their capital and their willingness to provide loans to both commercial and retail clients.

     

    What is the ECB's asset purchasing programme?

    The asset purchase programme, also known as Quantitative Easing (QE), was first introduced in 2015. This was to save the economy which at the time was still affected by the Eurozone debt crisis. It was also used as a method to stabilise inflation rates, the ECB spent four years purchasing asset-backed securities, covered bonds, and government and corporate debt. This benefited consumers as economic growth was lifted, which meant wages rose, borrowing costs lowered, and lending increased. However, in 2018, the ECB confirmed that it would stop its bond-buying scheme in order to stimulate the economy. The central bank had deterred the Eurozone away from a deepening economic crisis, over the years.

     

    Who are the Key Figures on the Governing Council?

    There are 25 representatives on the Governing Council but they don’t all get voting rights. Instead, 21 voting rights are shared between the representatives. The ECB’s executive board has a total of six members, the six get a vote at each meeting. The rest of the votes are split between two groups.

    Group 1

    This group is determined by the five countries with the largest
    economies. There are four voting rights which are shared and
    this is rotated on a monthly basis between countries.

    Group 2

    This group consists of the remaining 14 countries. There are 11 voting rights distributed amongst the group and this also rotates on a monthly basis.

    The members of the executive board of the governing council include:

    mario_avatar@2x

    Mario Draghi

    President of the ECB
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    Vítor Constâncio

    Vice-president of the ECB
    Benoît_avatar@2x

    Benoît Coeuré

    Member of the executive board of the ECB
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    Sabine Lautenschläger

    Member of the executive board of the ECB
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    Yves Mersch

    Member of the executive board of the ECB
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    Peter Praet

    Member of the executive board of the ECB

     

    European Central Bank History

    Prior to the establishment of the ECB, the European Monetary Institute were responsible for the issues regarding states adopting the euro. The EMI was part of the second stage of the EU’s Economic and Monetary Union (EMU). Then the ECB formally replaced the EMI on 1 June 1998, but could not exercise all of its powers until the Euro was introduced on 1 January 1999.

    The very first president of ECB was Wim Duisenberg, who was the former president of the Dutch central bank and the European Monetary Institute. However, Dusienberg was not welcomed by the French government who argued that the ECB should have a French president, seeing as the location was set to be in Germany. There was also rising tensions with the executive board, the United Kingdom wanted a place even though it had not joined the single currency.

    Last Updated: 24/05/2019

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