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European monetary policy

The European Central Bank (ECB) was formed in 1998 and works with EU member’s national central banks to oversee and co-ordinate EU monetary policy.

Activities of the ECB

1. The primary objective of the ECB is to ensure price stability, by keeping the European price index below 2% but also close to 2% to avoid the danger of deflation.

2. To help achieve price stability the ECB manages short-term EU interest rates and the money supply.

3. Like the Bank of England, the ECB also provides liquidity to the European system when needed.

If an EU country joins the Euro zone its central bank cedes much of its power to the ECB.

Long run neutrality of money

The underlying economic philosophy of the ECB is that, in the long run, real income and the level of employment is not determined by the money supply. The main objective of monetary policy is to achieve short term price stability as this is seen as the way to provide an economic framework for supply side growth.

The policy instrument used is short term interest rates.