The European Central Bank works to maintain stable prices in the euro area. The aim is that today’s money is tomorrow’s money. That is to say, the bank makes sure that the money of countries where the euro is the main currency does not depreciate.
It contributes to the security and stability of the European banking system. Thus, it makes sure that the money is safe. Its headquarters are in Frankfurt am Main, Germany.
The European Central Bank is the central bank of the countries in the European Union that use the euro as their currency.
Its main task is to maintain price stability. To this end, it ensures that inflation is low, stable and predictable. In doing so, it seeks to help plan countries’ savings and spending. The target is a 2% inflation rate over the medium term. To keep prices low, the Bank has a range of tools at its disposal.
Interest rates are one of them. Monetary policy is how it ensures price stability.
When the economy contracts, inflation usually falls.
But if inflation is already too low when a recession occurs, it is likely to fall to a negative level. If prices fall continuously and across the board – a phenomenon we call deflation – it draws the economy into a vicious circle. For example, if we all expect prices to fall, we postpone today’s purchases to take advantage of lower prices tomorrow. If everyone does this, the economy can slow down and stagnate.
With this target of a 2% inflation rate over the medium term, the ECB is creating a buffer to avoid such a scenario.
The ECB’s mandate is set out in the Treaty on the Functioning of the European Union, Article 127(1). The Treaty adds that ‘without prejudice to the objective of price stability’, the ECB shall also support the general economic policies in the EU with a view to contributing to the achievement of the objectives of the Union as set out in Article 3 of the Treaty on European Union.
These objectives include balanced economic growth, a highly competitive social market economy aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment – without prejudice to the objective of price stability.
The Treaty states that the ECB shall also contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system. Finally, it states that the ECB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources.
The ECB supervises banks in the euro area so that they can rest assured that they will cope with difficulties. Consistent and standardised supervision across the euro area promotes safety and strengthens bank stability.
The ECB develops and issues euro banknotes. It invests in new technologies to make banknotes more secure and wear-resistant. It coordinates their production and circulation with the countries that use the euro.
The ECB keeps the financial infrastructure well-functioning. It manages and allows money to move smoothly and efficiently within and between countries.
The ECB has the ability to maintain financial stability. It identifies risks and makes recommendations to mitigate them – risks that upset the balance of the financial system, such as disruptions in stock markets or a sharp fall in housing prices. In this way, citizens and businesses can plan, and invest with confidence for the future.
In future articles we will tell you more facts and information about the ECB.