Eurpean Central Bank (ECB)

The European Central Bank under President Wim Duisenberg sets a common interest rate
for the eleven countries that have entered the Euro Zone. Duisenberg has described the
ECB as the most open central bank in the world.

Whilst this is open to debate, it is clear that the Bank will have a very strong degree of
independence when making interest rate decisions each month. This is despite the
growing political pressure from centre-left parties in Italy, France and Germany who have
now assumed power and are unambiguously in favour of policies that promote job

European Central Bank
Location: Frankfurt
Goal: Price Stability
Chairman: Win Duisenberg
Money target: Euro area broad money growth
Inflation target: Eurozone inflation below 2%
Policy tool: European area interest rate
Meetings: Monthly
Voting: Council votes split between countries
Decision: Simple majority vote of council members
Minutes: no minutes published

Bank of England
Location: London
Goal: Price Stability
Chairman: (Governor) Mervyn King
Money target: no explicit target for money supply
Inflation target: 2% +-1% (ie 1-3%)
Policy tool: short term base interest rates
Meetings: monthly
Voting: nine member MPC (Monetary Policy Committee) - one vote each
Decision: Simple majority voting among MPC
Minutes: minutes published a fortnight later


The ECB is modeled along the lines of the Bundesbank.

In October 1998 the ECB Council set out its monetary strategy for the Euro Area.

· It’s main policy objective will be to achieve price stability within the Euro Zone – defined
as “a year-on-year increase in the Harmonised Index of Consumer Prices for the Euro
Area of below 2%”.
· This target contrasts with the UK approach, where the Bank of England aims to keep
RPIX inflation within 1% either side of 2.5%. The MPC has a symmetrical inflation target –
that is not the case with the ECB.
· In continuity with the Bundesbank’s approach, the ECB will target the growth of the
broad money supply when assessing where interest rates should go. Broad money is
basically determined by the growth of bank deposits – many of which are created through
bank loans and over-drafts.
· The Bank will also take into account a range of other monetary and financial indicators
when setting interest rates (including data on wage inflation and the trend in raw material

The ECB will not publish inflation forecasts and minutes of meetings will remain a secret.
Duisenberg claims this allows Council members to make fully independent decisions.
Critics question this lack of policy transparency at a vital time in the ECB’s history

The ECB has moved relatively slowly in changing interest rates - with only four rate
changes during the whole of 2001 at a time when the Euro Zone economy was heading
into a clear economic downturn. The ECB has been criticised for policy inertia - but with
inflationary pressure in the Euro Zone at relatively high levels during 2001, there were
constraints on the ability of the ECB to cut interest rates