Low-interest-rate policy – why, and what for?
Executive Education / 4 February 2020
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Annette Blanks Schwerpunkte liegen darin, bankfachliche Themen für unterschiedliche Zielgruppen praxisnah zu konzipieren und in adäquate Lernformen und Trainingseinheiten umzusetzen, wie z. B. Zertifikatsstudiengänge, Seminare oder Blended Learning-Konzepte.

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In the banking sector, monetary policy is the big issue par excellence. The term covers any measures taken by governments or central banks that impact on, for example, the amount of money in circulation, interest rates, the number of loans and similar issues. When any of these concepts are mentioned, even newcomers to banking immediately think of the European Central Bank (ECB). And rightly so, because it bears the ultimate responsibility for monetary policy. In this blog post, we describe its structure, explain its remit and objectives, and discuss why the ECB continues to pursue its low-interest-rate policy.

The structure of the European central banking system

When Stage Three of the EU’s Economic and Monetary Union was implemented on January 1, 1999, the euro became the official currency of 11 EU member states (the eurozone). Since then, the eurozone has grown to include 19 member states. A monetary union of this size, characterised by significant developmental disparities between the individual nations involved, could scarcely be more complex. So one of the top priorities was to put a well-thought-out structure and organisation in place to keep it stable.

The ECB is a supranational institution headquartered in Frankfurt am Main, Germany. It forms an integral part of the European System of Central Banks (ESCB), which also includes the national central banks of all EU member states (including non-eurozone countries). It is a corporate legal entity and currently employs around 3,500 staff. Internally, it is divided into three decision-making bodies. The ECB’s Governing Council is the main decision-making authority. It consists of the governors of the 19 national eurozone central banks plus the six members of the ECB’s Executive Board. The Executive Board is responsible for implementing the policy decisions adopted by the Council. It consists of the President (Ms Christine Lagarde since November 1, 2019), the Vice-President (Mr Luis de Guindos since June 1, 2018) and four other members. The third board-level body is the General Council, a transitional entity which will continue to exist as long as the euro has not been adopted as the national currency of every EU member state. It is tasked with discussing monetary policy issues, but does not have the authority to adopt resolutions. A detailed ECB organisation chart can be viewed here.

What is the ECB’s remit?

The ECB’s primary remit is to conduct monetary policy and maintain price stability. It also undertakes foreign-exchange operations and is responsible for managing the eurozone’s reserves, i.e. holding the official foreign currency reserves of e.g. dollars, yen, etc. The ECB is also responsible for ensuring the smooth operation of payment systems. In fulfilling its remit, it must act without seeking or taking political instructions from any national or supranational agency, to ensure that monetary policy remains strictly independent.

Based on this remit, the ECB’s objective is to support the sustainable development of Europe by enabling a balanced business sector and a competitive social market economy, as well as pursuing the associated aims of full employment and social progress.

Low-interest-rate policy – both curse and blessing?

In late 2019, Christine Lagarde succeeded Mario Draghi as President of the ECB. Many people hoped that her appointment would signal the end of the bank’s low-interest-rate policy, as we reported back in 2017. Investors in particular would welcome a change, as they are currently earning no or very little interest on their money. However, Lagarde and consequently the ECB have continued to pursue this policy.

The bank’s low-interest-rate strategy involves reducing the base rate to zero percent. This gives companies plenty of options for obtaining cheap loans, which is one of the main reasons for the ECB’s low-interest-rate policy: Effectively, the bank is using this instrument to stimulate the economy. In times of economic growth, interest rates are raised to prevent the economy from overheating; if the economy slows down too much, interest rates are reduced to avert a dramatic slump. Currently, there is no prospect of an end to the low-interest-rate policy; politicians and economists regularly argue about it in the media.

For anybody would like to know more about this influential topic and also deepen their knowledge of banking issues in general, we offer our Banking for Graduates seminar. Please visit our website for further details.