However, with the introduction of Euro, foreign reserve assets are shifting in favor of Euro. This trend is expected to continue as EU becomes one of the major trading partners for most countries around the world.
The European Central Bank: The European Central Bank (ECB) comprises the Executive Board and a Governing Council. ECB is the governing body that determines the monetary policy for the EMU countries. The Executive Board implements the policies made by the Governing Council. The Executive Board of ECB comprises the president, the vice president and four other members. These individuals along with the governors of the member national banks comprise the Governing Council.
New monetary policy decisions are usually taken by a majority vote. The president has the deciding vote in the event of a tie. The policy meetings are biweekly. Although ECB meets biweekly and has the power to change the monetary policy in any of these meeting, it is only expected to do so where an official press conference is scheduled afterwards.
The EMU’s primary objective is price stability and growth. So ECB has a strict mandate based on inflation and deficit. ECB tries to keep the Harmonized Index of Consumer Prices (HICP) below 2% and M3 (money supply) annual growth below 4.5%.
The ECB and the European System of Central Banks (ESCB) are independent institutions from both national governments and other EU institutions. This operational independence is granted to them as per Article 108 of the Maastricht Treaty.
How ECB achieves its policy targets of price stability and growth? The primary tools the ECB uses to control monetary policy are the Open Market Operations. ECB has at is disposal four categories of open market operations that it can use to manage interest rates, control liquidity and signal monetary policy stance.
Main refinancing operations are regular liquidity providing reverse transactions. Bulk of refinancing for the financial sector is done through these operations. These refinancing operations are conducted weekly with a maturity of two weeks.
Longer term refinancing operations are liquidity providing reverse transactions with a monthly frequency and a maturity of three months. Fine tuning operations are executed on an ad hoc basis with the aim of both managing the liquidity situation in the market and steering interest rates.
ECB uses structural operations to adjust the structural position of the Eurosystem vis-à-vis the financial sector. It involves the issuance of debt certificates, reverse transactions and outright transactions. The ECB minimum bid rate is the key policy target for the ECB. It is the level of borrowing that ECB offers to the central banks of its member states.
ECB does not usually have the exchange rate target but can factor in exchange rates in its policy deliberations as exchange rate impacts price stability. Therefore ECB is not constrained from intervening in the forex markets if it believes that inflation is of concern.
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