What is European Central Bank?

The European Central Bank, or ECB, is the main monetary institution of the European Union. It governs the Euro currency and is responsible for the financial and monetary affairs of the region. The ECB was established in 1998. It is one of the seven EU institutions that were agreed upon back then in the Treaty of Amsterdam.

The European Union is made up of 27 member states, of which 19 accept the Euro as their national currency. Collectively they are referred to as the Euro Zone. The monetary policies that the ECB makes directly govern these countries, and at the same time they also influence considerably the non-euro countries’ policies.

The ECB’s main functions include:

- Issuing the Euro

- Ensure that there is as much price stability as possible in the Euro zone

- Setting the ECB interest rates

- Supervising the banking and other financial operations in the EU while also assisting the member states with their economic policies so that they are in line with the EU objectives

- Make and oversee the monetary and the financial policies for the EU

- Support economic growth efforts across the region

The ECB’s headquarters are in Frankfurt, Germany. The Governing Council of the Bank is composed of the central bank governors of the 19 states that form the Euro Zone along with six executive board members. the President of the ECB and the various other members are appointed by the Governing Council and they are approved by the European Parliament.

In a nutshell the ECB is comprised of:

- The Supervisory board which takes care of the monitoring of inflation levels and proposals for monetary policies to be conducted

- The Governing Council which acts as the main decision making body

- The Executive Board which implements the decisions that have been approved by the Governing Council

The ECB is governed by EU laws and it is held accountable through public hearings with the EU Parliament members. It is important to point out that all EU members have to contribute capital to the ECB. This contribution is based on each country’s population and GDP.

The ECB aims to keep regional inflation level at around 2%. This is in accordance to the principle of price stability. The ECB can keep the inflation rate under control by raising interest rates accordingly. This affects the cost of loans, the cash in circulation, and ultimately economic demand. On the other hand, in cases where there is a recession or a stagnant period the ECB cuts interest rates so as to help in stimulating the economy in the EU.

Being the sole issuer of the Euro currency, and playing such an important role in monetary policies across so many countries, it goes without saying that the ECB is very important to bear in mind when carrying out fundamental analysis. There is an ECB meeting held every six weeks, and issues such as regional economic conditions, the plans for economic interventions and deciding the ECB interest rate. Hence it is best to keep an eye on what is decided during such meetings as these often have a considerable impact on trading and investment decisions.