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Tue, Feb 20, 2024

European Central Bank – Role And Impact On The Euro

The Treaty of Amsterdam, which revised the Treaty on the European Union, led to the establishment of the European Central Bank (ECB) in June of 1998. In addition to this, it laid the groundwork for the establishment of the European System of Central Banks (ESCB). The European System of Central Banks (ESCB) is comprised of the European Central Bank (ECB) as well as the national central banks of all EU member states, including those that have not embraced the Euro.

Euro Currency all denomination notes and coins

After the introduction of the Euro as the official currency for the Euro region on January 1, 1991, the European Central Bank (ECB) was able to begin using all of its powers for the first time. During this time, the national central banks of the 11 countries that make up the EU handed over responsibility for monetary policy to the European Central Bank (ECB). Later on, other members within the EU joined, including Greece, Slovenia, Cyprus, Malta, Slovakia, Estonia, Latvia, and Lithuania.

Historical Events That Created the ECB

The European Central Bank has played a major role in serving the United Kingdom throughout history since it was established. Let’s look at some of its major milestones over the years which led to the creation of this central bank that we know today. They are as follows:

Economic and Monetary Union

In June of 1988, the European Council reaffirmed its commitment to the goal of achieving an Economic and Monetary Union on a step-by-step basis. It gave this responsibility to a committee that would be led by Jacques Delors, who was serving as President of the European Commission at the time. This committee would investigate and suggest tangible steps leading up to this union. Members of the committee included the governors of the national central banks of the countries that made up the European Community (EC) at the time.

European Debt Crisis

The European debt crisis started when the newly elected government of Greece discovered the country’s true amount of debt and budget deficit and notified EU institutions of the immediate threat of a Greek sovereign default. As a direct result of this, the yields on government bonds issued by a number of nations inside the Eurozone began to dramatically increase. Because of this, the panic that was already there became even worse. This fear was further made worse since the European Central Bank (ECB) was unable to respond to the situation and intervene in the markets for state bonds for two reasons. To begin, due to the fact that the legislative structure of the ECB often prohibits the acquisition of national bonds.

Because of this, the European Central Bank was unable to engage in quantitative easing as quickly as the Federal Reserve and the Bank of England did in 2008, which was an essential factor in restoring order to the financial markets. Second, in 2005, the ECB adopted a decision that required a certain minimum credit rating for all sovereign bonds issued in the Eurozone in order for those bonds to qualify as appropriate collateral for the ECB’s open market operations. In 2010, the European Central Bank, which was run by Jean-Claude Trichet and faced with these legal limits, was hesitant to interfere in order to calm down the financial markets.

ECB Governing Council member Martins Kazaks said before ending the PEPP Purchases program ECB will give perfect reason to alter the asset purchases

Role of the European Central Bank

Most of us actually don’t realize how big of a role these financial institutions play in the world. They are responsible for the economic conditions of their respective countries and the people depend on them to not cause the country to go into default or economic recession. Similarly, the European Central Bank also plays a major role in the current economic situation in the country. This is because of the following reasons:

Monetary Policies

The European Central Bank consistently releases monetary policies in accordance with the current financial situation in the country. The Monetary Policy Committee (MPC), which consists of nine members, is responsible for determining the policy regarding interest rates. The Governor of the European Central Bank maintains control over the Monetary Policy Committee (MPC), which is a position held by a member of the public who is also employed by the European Central Bank in a professional capacity. In addition to the European Central Bank’s top economist, the committee is comprised of the three deputy governors responsible for monetary policy, financial stability, and markets and policy respectively.

The Chancellor of the Exchequer is an important figure who is comparable to the Secretary of the Treasury in the United States and is the one who makes the appointments for the remaining four members of the committee. The Monetary Policy Committee gets together on a regular basis (eight times a year) to discuss whether or not the monetary policy should be altered in order to fulfill the inflation target set by the government. Every person on the committee has one vote, and reaching a decision that everyone agrees on is not necessary. The European Central Bank is responsible for adjusting the bank rate which is also often known as the rate that is charged to domestic banks.

Inflation Control

Inflation is a major crisis that takes over several countries like a disease. It is just like the COVID-19 virus as it doesn’t stop in just one country, it takes over several countries all together. As always like in the past, whenever inflation took over a single country, most of the countries in the vicinity were impacted as well. This is because inflation occurs due to a major economic crisis. This type of crisis usually impacts more than one country simply because it has no choice. Trade routes are impacted and international flights become at a stand-still. A rate of inflation that is both low and stable is necessary for an economy to be considered healthy.

Euro Inflation ranges are expected to 2 this month versus 1.9

The annual percentage increase in general prices that should be allowed in the EU is predetermined by the government as the maximum allowable increase.  The European Central Bank is responsible for ensuring that inflation remains within the desired range. It would be beneficial to have a little bit of inflation. However, rates of inflation that are both high and erratic can be destructive. When prices are difficult to foresee, it is difficult for individuals to plan how much money they can spend, save, or invest in the future. In the worst-case scenario, severe and fluctuating inflation can bring about the collapse of an economy.

Economical Information

One of the best places to get information about the economic situation of any given country is from the central bank controlling the economic decisions of the country. This is because they are the ones making these decisions so you can only get the most accurate information from them. We really recommend you avoid getting this information from magazines and other non-financial sites as they usually twist the words to exaggerate them for views and ratings. They are not a reliable source of information. Almost all central banks have a press release section where they release this information and it would be best to check this section regularly in order to be up to date on the economic situation of the country. If your central bank does not give out this information on their website it would be best to reach out to them to see where would be the best place to receive it instead.

Regulatory Reforms

Following the devastating effects of the global financial crisis in 2008, the United States government passed additional regulatory changes in 2012 as part of the Financial Services Act. As a result of taking these actions, the financial institution established a new division of the bank called the Prudential Regulation Authority as well as an independent body named the Financial Policy Committee, which was modeled after the MPC. In addition to this, the bank started to exercise supervision over suppliers of financial market technology such as central securities depositories and payment systems. If it weren’t for these regulatory reforms which are consistently being updated, the EU’s economy would still be following the third-world ways of handling money through cash only.

How the ECB Impacts the Pound Market

The European Central Bank is directly responsible for impacting the pounds market in the forex industry. This is because the Pound is the national currency of the EU and the European Central Bank is the central bank of the EU. Therefore, any major releases, statements, or updates from this national bank will have a big impact on the pound markets. And this has actually been seen happen on several occasions. Almost every time the ECB releases something important, it either causes the EUR markets to crash or skyrocket. Here are some of the most important things to look out for from the European Central Bank:

Interest Rate Decisions

The European Central Bank’s interest rates are updated on a regular basis. This is especially true if the country is experiencing a severe economic crisis. You should be aware that every bank works hard to maintain interest rates as low as possible. This is done to keep the economy from entering a slump. However, there are times when the bank is forced to raise its interest rates. This is especially true when the country is experiencing severe inflation.

In such a scenario, the bank has little alternative but to raise interest rates in order to contain inflation. When the European Central Bank announces its interest rate decision, the Pound markets become quite turbulent. This is in anticipation of the next ruling. However, once a choice is made, the market may be quite volatile. If the interest rate decision was favorable, the Pound might enter bullish markets. If it was negative, the Pound may enter bearish markets.

EU Bank Meeting

Member Speeches

The European Central Bank delivers speeches at least twice a week. This is to inform the public on the present state of the financial system and how the ECB intends to participate in the discussion. Although each speech might be significant since you never know what will be disclosed, the president, chairman, and governors’ remarks are more essential than the others. It should be observed, however, that these powerful people rarely divulge any significant financial data that may help us navigate the financial world. They want to remain neutral unless it is in the best interests of the country not to. These member remarks are critical in deciding the Pound’s market movement. If an ECB member speech is on your economic calendar, you should play your cards carefully.

Statistical Releases

Aside from its regular releases of comments and monetary decisions, the European Central Bank also publishes statistical data on occasion. This is really helpful in keeping a trustworthy connection with its stakeholders, in my opinion. Without the statistical evidence, we would have to accept what they say in their speeches, as well as their reasons for altering their monetary policies. This statistical data truly puts money where their mouth is, allowing us to understand why each event arose and what the European Central Bank did to influence the situation. If the ECB’s statistics data shows a good scenario, the EUR markets will most likely be bullish and in bullish markets. However, if no press release is available. The markets will correct itself based on their weight.

Meeting Minutes

The European Central Bank usually distributes its Meeting Minutes a few days or weeks after making a major decision. These Minutes are essentially a documentation of the conversation that took place amongst ECB members as they were deciding on the decision that was to be made. This is critical in knowing who is on their side and why they made the decision they did. We usually get to hear the meeting minutes following the announcement of the interest rate or any other monetary policy decision, which helps us comprehend the logic behind the decision they took. This has a significant influence on EUR markets. Depending on whether the outcome was favorable or bad, the EUR currency will become highly volatile.

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