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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 creation. 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 TARGETS AND OBJECTIVES 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 prices). 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 |