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What is the Governing Council monetary policy meeting?
The aim of the Governing Council’s monetary policy meeting is to set key interest rates and other policies that will maintain price stability across the euro area. Maintaining price stability is the primary aim of the ECB itself according to the Treaty on the Functioning of the European Union, making the monetary policy meetings the most important in the ECB’s calendar.
The Governing Council defines ‘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 medium term the council aims to achieve an inflation rate close to, but below, 2%.
When is the next ECB meeting and interest rate announcement?
The Governing Council’s monetary policy meeting is held every six weeks, with the next meeting scheduled for 24 October 2019.
The council’s decisions are always announced via press release at 1.45pm CET on the day of the meeting, followed by an ECB press conference at 2.30pm CET.
How does the ECB meeting affect traders?
The ECB’s Governing Council is responsible for setting monetary policy, with the aim of achieving an inflation rate of just under 2% across the euro area. Governing Council meetings are important dates in traders’ calendars as they set the official interest rates for the eurozone.
The ECB requires national central banks (NCBs) in the eurosystem to use these rates for transactions with commercial banks. The three key rates are:
- The minimum bid rate: the rate for one-week loans
- The deposit rate: the rate paid on deposits held with NCBs
- The marginal lending rate: the rate for overnight loans
In addition to setting these rates, the Governing Council can also apply quantitative easing (QE) as required. QE involves injecting money directly into the economy with the aim of boosting spending.
These policies have a strong influence on the interest rates set by commercial banks and other lenders, indirectly affecting spending and inflation across the eurozone.
Of course, traders and investors are particularly concerned about the impact of ECB policy on demand for stocks, bonds, currencies and other securities, which may cause them to change their strategies. Many traders will therefore try to predict which way monetary policy is heading ahead of each meeting.
Why is ECB monetary policy important to traders?
Traders look to gain an understanding of what monetary policy will be in the future. If they can get their predictions right, they can optimise their portfolios ahead of any announcement to maximise their profits and limit losses.
Traders expect interest rate hikes to cause ripple effects that will reduce the value of their stocks, bonds and other securities, but increase the value of the euro relative to other currencies. Conversely, lower interest rates or the implementation of quantitative easing is likely to have the opposite effect.
Traders will therefore look at the composition of the Governing Council, the distribution of voting rights between countries, and broader economic factors such as Brexit, to make predictions about which way the ECB will vote.
Markets to watch
Get the latest European Central Bank news
What are the key ECB rate decisions?
The main way the Governing Council seeks to control inflation is by changing key European interest rates, including the minimum bid rate, deposit rate and marginal lending rate.
- Minimum bid rate
The minimum bid rate is the rate national central banks (NCBs) in the eurosystem must charge for one-week loans. This is sometimes referred to as the main refinancing rate or ECB refi rate.
This rate is the lowest rate at which commercial banks can borrow capital, effectively acting as the base rate of interest for the eurozone. It has a strong influence on the interest rates charged by commercial banks to businesses and consumers. This, in turn, will affect the amount of spending, borrowing and saving across the economy.
- Deposit rate
The deposit rate is the rate of interest paid on overnight deposits made with NCBs in the eurosystem. If the rate is increased, commercial banks get a better return on money deposited with NCBs. All other things being equal, this should encourage them to deposit more funds with NCBs and give fewer overnight loans to other commercial banks in the system.
The opposite is true if the rate goes down - banks get a lower return on any money deposited with the NCBs, which encourages them to deposit less money and give more overnight loans. The deposit rate is therefore another way the Governing Council can influence the supply of money in the economy.
- Marginal lending rate
The marginal lending rate is the rate NCBs must charge commercial banks for overnight loans. These are loans used by banks to meet their reserve requirements for the day, ensuring they have enough cash to meet their clients’ needs.
The ECB sets this rate above the minimum bid rate to penalise banks for borrowing emergency funds to meet their reserve requirements. The wider the gap – or corridor – between the marginal lending rate and deposit rate, the greater the penalty. This corridor therefore affects how conservative banks are with their capital, and how willing they are to give loans to commercial and retail clients. This, in turn, affects spending across the economy.
What is the ECB’s asset purchase programme?
The ECB’s asset purchase programme, or quantitative easing (QE), is when the Bank produces and spends new money to increase liquidity in markets. It was introduced after 2008, when the Governing Council introduced a number of non-standard policies to deal with the financial crisis.
The Governing Council calls QE its asset purchasing programme (APP), and mainly uses it to buy corporate and public sector bonds. As well as injecting money directly into the economy, investing in these assets increases their prices and reduces their yields, encouraging investors to seek returns elsewhere. This causes a money multiplier effect, which should increase spending across the economy.
ECB meeting schedule
The Governing Council assembles twice a month in Frankfurt, Germany. It has two types of meetings: a monetary policy meeting, held every six weeks, and a non-monetary policy meeting in which it discusses the other responsibilities of the ECB. The meeting dates for 2019 are as follows.
ECB meeting calendar 2019
|Monetary policy meeting and announcement||Non-monetary policy meeting|
|24 January||9 January|
|7 March||20 March|
|6 June*||26 June|
|25 July||10 July|
|12 September||25 September|
|24 October||9 October|
|12 December||4 December|
*not in Frankfurt
Who are the key people on the Governing Council?
There are 21 voting rights to be shared between the 25 representatives on the Governing Council. All six members of the ECB’s executive board get a vote at each meeting and the remaining 15 votes are distributed between two groups:
- Group 1: This includes the five countries with the largest economies. They share four voting rights, which rotate between countries on a monthly basis
- Group 2: This includes the remaining 14 countries. They share 11 voting rights, which rotate between countries on a monthly basis
Analysts look to classify Governing Council members as either monetary hawks or doves with the aim of predicting future policy.
2019 committee members
ECB Executive Board
|Mario Draghi||President of the ECB||Dove|
|Vítor Constâncio||Vice-president of the ECB||Dove|
|Benoît Cœuré||Member of the executive board of the ECB||Neutral|
|Sabine Lautenschläger||Member of the executive board of the ECB||Hawk|
|Yves Mersch||Member of the executive board of the ECB||Hawk|
|Peter Praet||Member of the executive board of the ECB||Dove|
NCB Governors – Group 1
|Jens Weidmann||President, Deutsche Bundesbank||Hawk|
|François Villeroy de Galhau||Governor, Bank of France (Banque de France)||Dove|
|Ignazio Visco||Governor, Bank of Italy (Banca d'Italia)||Dove|
|Luis María Linde||Governor, Bank of Spain (Banco de España)||Dove|
|Klaas Knot||President, The Dutch Bank (De Nederlandsche Bank)||Hawk|
|Jan Smets||Governor, National Bank of Belgium (Nationale Bank van België)||Neutral|
|Ardo Hansson||Governor, The Bank of Estonia (Eesti Pank)||Neutral|
|Philip R. Lane||Governor, Central Bank of Ireland||Neutral|
|Yannis Stournaras||Governor, Bank of Greece (Τράπεζα της Ελλάδος)||Dove|
|Chrystalla Georghadji||Governor, Central Bank of Cyprus||Dove|
|Ilmārs Rimšēvičs||Governor, Bank of Latvia (Latvijas Banka)||Neutral|
|Vitas Vasiliauskas||Chairman of the Board, Bank of Lithuania (Lietuvos bankas)||Neutral|
|Gaston Reinesch||Governor, Central Bank of Luxembourg (Banque centrale du Luxembourg)||Neutral|
|Mario Vella||Governor, Central Bank of Malta||Neutral|
|Ewald Nowotny||Governor, Oesterreichische Nationalbank||Neutral|
|Carlos Costa||Governor, Bank of Portugal (Banco de Portugal)||Dove|
|Boštjan Jazbec||Governor, Bank of Slovenia (Banka Slovenije)||Neutral|
|Jozef Makúch||Governor, National Bank of Slovakia (Národná banka Slovenska)||Neutral|
|Erkki Liikanen||Governor, Bank of Finland (Suomen Pankki)||Neutral|
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1 By number of primary relationships with FX traders (Investment Trends UK Leveraged Trading Report released July 2019)
2 It’s important to realise that members’ views are not fixed and likely to change over time based on the economy and the council’s inflation rate targets. The table above illustrates where the members were thought to stand at the time of writing (20 October 2017).