Trading News for Beginners: What is the European Central Bank?
In this article you’ll learn:
- The abbreviation for the European Central Bank – ECB
- The ECB’s role in the financial and monetary system
- Whether the ECB prints money
- The connection between the ECB and Eurogroup
- How the ECB influences trading and investing decisions
As the name implies, the European Central Bank is Europe’s central bank and is widely known by its abbreviation, the ECB. Responsible for supervising the monetary and banking system in the Eurozone, the ECB is at the top of the banking structure.
A common misconception is that the ECB prints all the Euro notes in circulation. This is actually the job of national central banks like the Banque de France or the Deutsche Bundesbank. The ECB does create money when it issues credit to banking institutions during bond or mortgage asset purchases, but these exchanges are credited electronically in what is known as liquidity.
ECB’s role in the financial and monetary system
The EU is the world’s largest single trading bloc and millions of businesses and consumers depend on a sound financial system. As such, the ECB’s role is incredibly important in regulating and maintaining the value of the common currency. The ECB’s primary concerns are price stability and maintaining the value of the EUR. The main goal is to keep inflation at around 2 percent growth per year.
The central bank has the power to set interest rate guidance that is followed by the entire banking sector – 5,963 banks - in 27 EU member states, who sell their services to 341 million consumers living in the Eurozone. The ECB sets the overnight lending rate used by banks to lend funds to each other. The ECB also pays the same interest rate to banks which keep reserve funds with the central bank.
The connection between the ECB and Eurogroup
The Eurogroup is an informal group of all the finance ministers in the EU, who meet to discuss the biggest financial and economic issues of the day. As the main supervisor of the banking and financial sector, the ECB works with the Eurogroup to find solutions for challenges in the financial markets. An example was the sovereign debt crisis which started in 2009, when Greece and other EU countries were unable to pay their national debts.
How the ECB influences trading and investing decisions
The ECB has a massive influence on trading and investing decisions, and its interest rate decisions can move the EUR currency pairs, depending on the circumstances. Higher or lower interest rate guidance from the central bank has a ripple effect on a host of markets:
- Commodity markets
- Forex markets
- Mortgages and corporate loans
- Investment in shares
- Bank stocks and earnings per share expectations
That’s why traders and investors closely follow the ECB’s monthly monetary policy and interest rate decisions and use them to decide on currency trades or stock market investing.
The ECB and trading news
The ECB uses a lot of technical terms in its monthly statements, let’s unpack them.
Price Stability: a typical expectation of daily prices paid by consumers and businesses.
Inflation: the rate at which average prices for goods and services increase or decrease per year.
Quantitative Easing (QE): Also known as the asset purchasing program, this is when the ECB buys up assets like corporate and bank bonds, in addition to government bonds. When the economy is in a recession and inflation is relatively low, the central bank may use QE to support the financial system and avoid debt defaults.
Foreign Reserves: The ECB maintains a large stock of foreign reserves and gold to support its monetary policy objectives and back up its own financial position.
Liquidity: cash flow.
You may still have questions about how the ECB impacts the trading and investing markets. Admirals' free webinars are a wealth of information about trading news analysis and our hosts are all experienced traders and investors.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.