The European Central
Bank's decision to increase, decrease, or maintain interest rates. Controlling
interest rates is the key mechanism of monetary policy, and the ECB influences
interest rates by first changing the "overnight rate" through the
purchase or sale of government bonds. Lowering rates can spur economic growth
but may incite inflationary pressures. On the other hand, increasing rates
slows inflation but can stymie growth.
The European Central Bank makes a
concerted effort to be transparent in its policy. Frequent speeches by Bank Governers
make policy goals clear and the Bank adheres to a stated inflation target of 2
percent, changing rates accordingly to meet that goal. Because of this, rate
decisions are generally well anticipated, but very important nonetheless The ECB's rate decision has an enormous influence on financial markets. Because
the ECB interest rate is essentially the return investors receive while holding
Euros, changes in rates affect the exchange rate of the Euro.
Because rate
changes are usually well anticipated, the actual decision does not tend to
impact the market. But if the ECB changes rates they will hold a press
conference where some rationale for the decision is offered. Market
participants pay close attention to the press conference, hoping to clue in on
the likelihood of further rate changes. Often, the language used in the press
conference holds important signals to how ECB feels about inflation and the
economy.
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