How the ECB decides on the level of its interest rates

5th December 2008, Comments 0 comments

Unlike other central banks, such as the Bank of England, the ECB does not publish the minutes of its policy-setting meetings.

BRUSSELS - The European Central Bank, which announced a record interest rate cut of 0.75 percentage points on Thursday, holds policy-setting meetings every two weeks, usually on the first and third Thursdays of each month.

This month's meeting was one of two each year that are held not in the bank's hometown of Frankfurt but in a eurozone capital.

The ECB has been responsible for monetary policy in the 15 countries that share the euro from January 1999 and has an obligation to ensure price stability.

The number of eurozone members will grow to 16 when Slovakia joins in January.

The ECB has set a ceiling target for medium-term inflation of "below but close to 2.0 percent."

On Thursday, it decided to lower its benchmark "refi" or refinancing rate by three quarters of a percentage point to 2.50 percent.

It was the first time the bank had made a cut of more than 0.50 percentage points and was also an unprecedented third reduction in two months.

Traditionally, the first of the two monthly meetings is dedicated to interest rates, while the second deals with more practical and administrative matters.

Nevertheless, the ECB retains the right to make interest rate decisions at any time, as it did on October 8 as part of an unprecedented joint action with the US Federal Reserve, the Bank of England and central banks in Canada, Sweden and Switzerland.

The body responsible for making decisions within the ECB is the governing council, a 21-strong committee comprising the six members of the executive board, plus the governors of all the national central banks of the 15 current eurozone countries.

The executive board is responsible for the day-to-day running of the ECB and currently comprises the bank's president, Jean-Claude Trichet (France), vice president Lucas Papademos (Greece), Lorenzo Bini Smaghi (Italy), Jose Manuel Gonzalez-Paramo (Spain), Juergen Stark (Germany) and Gertrude Tumpel-Gugerell (Austria).

The 15 national central bank chiefs are Guy Quaden (Belgium), Axel Weber (Germany), Georgios Provopoulos (Greece), Miguel Angel Fernandez Ordonez (Spain), Christian Noyer (France), John Hurley (Ireland), Mario Draghi (Italy), Yves Mersch (Luxembourg), Nout Wellink (Netherlands), Ewald Nowotny (Austria), Vitor Manuel Ribeiro Constancio (Portugal), Erkki Liikanen (Finland), Marko Kranjec (Slovenia), Athanasios Orphanides (Cyprus) Michael Bonello (Malta).

Each council member has one vote and decisions are taken by a simple majority.

Council members do not vote according to the interests of the country they represent but in the interests of the single currency area as a whole.

Formal votes are rare on the council, which sees itself more as a forum for discussion, with decisions made by consensus.

If the council is clearly divided on an issue, a formal vote is held.

Unlike other central banks, such as the Bank of England, the ECB does not publish the minutes of its policy-setting meetings, so it is never made public which board member voted in favour of a move in rates and who voted against.

Eurozone politicians have regularly called for such information to be made public in the name of greater transparency.


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