European Central Bank-Key Policy Rates-VRK100-06012011

EUROPEAN CENTRAL BANK

KEY POLICY RATES

Rama Krishna Vadlamudi    HYDERABAD

January 06, 2011


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Estonia has become 17th member of the Eurozone, adopting euro as its currency from January 1, 2011. This article discusses the key policy interest rates of European Central Bank (ECB). It also throws light on the intricacies of Eurozone, Eurosystem and such other terms connected with the European Union and its economy. The Eurozone is now facing some sort of a crisis after the global financial crisis of 2008 with several EU nations, like, Greece, Ireland and Spain facing economic chaos due to enormous public debt and bankruptcy.

European Central Bank (ECB):

The European Central Bank was established on June 1, 1998. The ECB sets the interest rates and is responsible for the single monetary policy of the euro area. It is headquartered in Frankfurt, Germany. It is part of the eurosystem.

Eurosystem:

Eurosystem is the central banking system of the euro area. The ECB and the national central banks of the European Union (EU) member states that have adopted the ‘euro’ as their common currency are part of the eurosystem.


Euro area (or Eurozone):

Those EU member states that have adopted the ‘euro’ as their single currency are part of the euro area. A single monetary policy for the euro area is conducted by the ECB under the responsibility of the Governing Council of the ECB. It is informally known as Eurozone, while the official name is euro area. The ‘euro’ was launched on 1 January 1999 on foreign exchange markets, and euro currencies replaced national currencies on 1 January 2002.

There are now 17 European countries which are members of the eurozone, with a common currency, the euro, and a single interest rate set by the European Central Bank (ECB). Estonia is the seventeenth country to adopt ‘euro’ as its common currency with effect from January 1, 2011. The list of these 17 EU member countries that have adopted ‘euro’ as their single currency are given in the annexure on page four. They make up of around three-fourths of EU’s GDP. The following graphic shows 15 countries that adopted ‘euro’ before 2009.

Note: The micro-states of Monaco, San Marino and Vatican City also use the euro, on the basis of a formal arrangement with the European Union. Andorra, Montenegro and Kosovo likewise use the euro, but without a formal arrangement.

Key interest rates of the ECB: There are three important rates set by the ECB. The most important of them is the refinancing rate of the Main Refinancing Operations (MRO).

1. Refinancing Rate:

This refinancing rate is considered as the key policy rate of the ECB. Main Refinancing Operation is a regular open market operation conducted by the national central banks (NCBs). Under the MRO, the NCBs provide the majority of the liquidity to the banking system in the euro area. MRO is conducted on a weekly basis and normally has a maturity of one week. The latest refinancing rate of 1.00%, effective from May 13, 2009, is the lowest in the ECB’s 10-year history.

MAIN REFINANCING OPERATIONS (MRO)

w.e.f.      Refinancing Rate (key ECB policy rate)   Action



13-May-09    1.00% fixed     down by 25 bp

8-Apr-09       1.25% fixed     down by 25 bp

11-Mar-09    1.50% fixed     down by 50 bp

21-Jan-09      2.00% fixed     down by 50 bp

10-Dec-08     2.50% fixed     down by 75 bp

12-Nov-08    3.25% fixed     down by 50 bp

15-Oct-08    3.75% fixed     down by 50 bp

9-Jul-08       4.25% variable  up by 25 bp

2. Deposit Facility: It enables commercial banks in the euro area to park their surplus funds with their respective national central banks (NCBs) at this rate. It is an overnight facility. The present rate is 0.25%, effective from April 8, 2009. (It is similar to Reserve Bank of India’s Reverse Repo rate under its Liquidity Adjustment Facility.)

3. Marginal Lending Facility: It is an overnight facility by which liquidity is offered to the financial sector from the eurosystem. It is a standing facility through which counterparties receive credit from a national central bank at a pre-specified interest rate against eligible assets/securities. The present rate is 1.75%, effective from May 13, 2009. (It is similar to RBI’s Repo rate under LAF.)

Rate Corridor: The interest rates on marginal lending facility and deposit facility normally provide a ceiling and a floor for the overnight market interest rates. Overnight market rates are expected to move within this corridor.

OVERNIGHT FACILITIES

Deposit Facility Marginal Lending Facility

w.e.f               Rate Action w.e.f Rate Action

13-May-09    1.75% down by 50 bp

8-Apr-09      0.25% down by 25 bp 8-Apr-09 2.25% down by 25 bp

11-Mar-09   0.50% down by 50 bp 11-Mar-09 2.50% down by 50 bp

21-Jan-09 1.00% down by 100 bp 21-Jan-09 3.00% down by 75 bp

10-Dec-08 2.00% down by 75 bp

12-Nov-08 2.75% down by 50 bp 12-Nov-08 3.75% down by 50 bp

9-Oct-08 3.25% up by 50 bp 9-Oct-08 4.25% down by 50 bp

8-Oct-08 4.75% down by 50 bp

9-Jul-08 5.25% up by 25 bp

ANNEXURE:

European Union enlargement:

The European Union (EU) was established on November 1, 1993 after the ratification of the Maastricht Treaty by the member states. It was previously known as the European Economic Community (EEC). It is a political and economic union of the member states, mainly consisting of European nations. It aims to provide a single market for the member states. Its important institutions include the European Commission, the European Parliament, the European Court of Justice and the European Central Bank.

The EU is an amalgam of 27 Member States. In addition to the first six Member States of the EEC — Belgium, France, Germany, Italy, Luxembourg and the Netherlands — additional 21 countries are now members of the Union. These are: Denmark, Ireland and the United Kingdom (1973); Greece (1981); Spain and Portugal (1986); Austria, Finland and Sweden (1995); the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia (2004); and Bulgaria and Romania (2007). Croatia, Macedonia and Turkey have been waiting in the wings to join the EU.


Note: Seventeen EU countries have adopted ‘euro’ as their common currency; while ten EU countries have not adopted ‘euro’ as their currency and continue to use their own national currencies.



Data is as on January 6, 2011 SOURCES: ECB, BBC, Britannica Encl, etc.