The ECB rate decision and the Governing Council

Who sits on the Governing Council 

The Governing Council is the European Central Bank's monetary policy body. It combines the members of the Executive Board, who are appointed at European level and sit permanently, with the governors of the national central banks of every country that uses the euro. Because the currency union has grown, the national governors vote on a rotation, with the larger economies rotating less often than the smaller ones, while all of them attend and participate in the discussion. The Executive Board votes at every meeting.

One feature distinguishes it sharply from most other central bank committees. Decisions are conventionally taken by consensus, individual votes are not published, and dissent is disclosed only in general terms in the account of the meeting, such as a reference to a number of members holding a different view. A reader looking for a named vote tally will not find one, and this is a deliberate feature of an institution whose members represent economies with different cyclical positions inside one currency.

Why there are three rates 

The euro area sets three official rates rather than one, and each does a different job in the plumbing of the banking system.

• The deposit facility rate: what commercial banks receive on funds left overnight with the central bank. When the banking system holds more reserves than it needs, no bank will lend in the market below the rate it can earn risk free at the central bank, so this rate becomes the floor that market overnight rates settle near.
• The main refinancing operations rate: the cost of the regular weekly liquidity-providing operations through which banks borrow against collateral. Historically this was the central policy rate, and it is still described as such in the treaties and the older literature.
• The marginal lending facility rate: what a bank pays to borrow overnight from the central bank against collateral. It sits above the main rate and functions as a ceiling, because no bank needs to pay more in the market than it can pay here.

The three together form a corridor. Which of them is the effective policy rate depends on how much liquidity the banking system holds: in a system short of reserves, the refinancing rate is the operative one; in a system with abundant reserves, market rates sit at the floor and the deposit facility rate is what actually matters. Years of asset purchases left the euro area system with abundant reserves, which is why the deposit facility rate is the one quoted as the ECB policy rate in most market commentary, even though it is nominally the corridor's floor.

The mandate, and what it does not include 

The European Central Bank's primary objective, set in the treaties rather than by legislation that can be amended nationally, is price stability. Other objectives, including support for the general economic policies of the Union, are explicitly secondary and are pursued only without prejudice to the primary one. This is a narrower and more legally entrenched mandate than the dual employment and price stability mandate of the United States Federal Reserve, and it is the reason euro area policy communication is written almost entirely in the language of inflation.

The Council defines price stability quantitatively itself, and the target is symmetric, meaning that inflation persistently below the target is regarded as an equal problem to inflation persistently above it. The measure used is the harmonised index of consumer prices for the euro area as a whole, not for any member state.

What a meeting produces 

1. The decision, published in the early afternoon Central European Time on the second day of the meeting as a short statement listing the three rates and any change to them.
2. The monetary policy statement, read by the President at the press conference and published simultaneously. It carries the assessment of activity, inflation, financial conditions and risks in a stable structure that invites comparison with the previous one.
3. The press conference itself, with unscripted questions from journalists. This is where compressed statement language is elaborated, and it is a separate event from the decision.
4. The staff macroeconomic projections, at four of the year's meetings, giving forecasts for growth and inflation over the coming years. They are staff projections rather than Council forecasts, and no equivalent of a rate projection chart is published.
5. The account of the meeting, published about four weeks later. It is a narrative record attributing views to unnamed groupings, not a vote tally and not a transcript.

The instruments beyond the rates 

The Council also decides on the size and reinvestment policy of its asset purchase portfolios, on the terms of any longer-term refinancing operations offered to banks, and on the framework instruments designed to address unwarranted divergence in the borrowing costs of individual member states. That last category has no counterpart in a single-sovereign currency area, and it exists because the euro area has one monetary policy and many sovereign issuers.

The practical consequence is that euro area policy is watched through the spread between the government bond yields of different member states as well as through the level of the policy rate. A single policy rate transmits differently into economies with different debt levels, banking structures and mortgage conventions, and the divergence in those spreads is the visible measure of that difference.

How a decision is conventionally read 

Because no vote is published, the conventions used elsewhere for reading dissent do not apply. Practitioners instead compare the statement against the previous one word by word, read the projections for changes to the inflation path in the final forecast year, and weigh the press conference language on data dependence and on the sequencing of any future moves. Public remarks by individual governors between meetings are treated as a partial substitute for a vote record, with the caveat that a governor speaking nationally is not the Council speaking.