Monetary policy

The Eurosystem is responsible for the single monetary policy of the euro area.

The primary objective of the Eurosystem’s monetary policy is to maintain price stability in the euro area. In addition, the Eurosystem supports the economic policies of the member states, also with a view to achieving a high level of employment and sustainable and non-inflationary growth. Among its other tasks, it helps to maintain financial stability in the euro area. The Eurosystem adheres to the principle of an open market economy with free competition.

The ECB has quantified the definition of price stability as a year-on-year increase in the Harmonized Index of Consumer Prices (HICP) for the euro area of below but close to 2% in the medium term. The reference to the medium term takes account, above all, of the lag in the monetary policy transmission mechanism: shorter-term measures to combat, for example, a short-term shock to international raw materials prices would run the risk of creating additional volatility in the economy. A forward-looking approach is also necessary in view of the impact of inflation expectations on actual inflation; the single monetary policy aims to anchor inflation expectations solidly at levels consistent with price stability.

Quantifying the definition of price stability also contributes to a further aspect of the ECB’s monetary policy strategy: by increasing the transparency of monetary policy and providing a reference framework that is easy to understand, it provides a clear and measurable yardstick against which the public can hold the ECB accountable. This renders the ECB’s policies credible, which is a precondition for forming market expectations.

The ECB bases its monetary policy decisions on two complementary analytical techniques (referred to as the two pillars): economic analysis and monetary analysis.

The economic analysis assesses the short-to-medium-term determinants of inflation, focusing on real activity and taking account of the fact that price developments over these horizons are influenced by the interplay between the supply and demand of goods, services and production factors. Account is also taken of the macroeconomic projections produced every three months alternately by Eurosystem and ECB experts.

In view of the long-term connection between money and prices, the monetary analysis mainly serves as a means of cross-checking, from a medium-to-long-term perspective, the short-to-medium-term indicators resulting from the economic analysis.

The ECB takes particular care to communicate its assessments by means of official statements or regular publications, such as the Monthly Bulletin and the Annual Report.

Monetary policy decisions are taken by the Governing Council of the ECB and mainly consist in setting the key interest rates.

The Executive Board of the ECB implements monetary policy in accordance with the decisions and guidelines adopted by the Governing Council. The Eurosystem has a number of monetary policy instruments at its disposal in order to achieve its objectives.

  • Open market operations. These form the most important group of monetary policy operations. As a rule they are initiated by the ECB and executed by the NCBs, mainly in the money market, where most operations have a maturity of less than one year. They play an important role in steering interest rates, signalling the monetary policy stance, and managing the liquidity situation in the market.
  • Operations available to counterparties on their own initiative. These consist in the marginal lending facility and the deposit facility and can be used by eligible Eurosystem counterparties as required. By setting the interest rates on these operations the ECB fixes a floor and a ceiling for the overnight money market rate.
  • Minimum reserves on accounts with the NCBs. All euro-area credit institutions are subject to the requirement. The purpose of the system is to stabilize money market interest rates and create (or enlarge) a structural liquidity shortage, thus increasing the demand for central bank refinancing.

In accordance with the principles of operational decentralization and subsidiarity established at the European level, the monetary policy operations are carried out by the Eurosystem NCBs following the instructions given by the Executive Board and under uniform terms and conditions in all the member states.

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Payment systems

Article 105.2 of the EC Treaty and Articles 3 and 22 of the Statute of the ESCB/ECB state that one of the basic tasks of the ESCB is to facilitate the smooth operation of payment systems, an objective which is jointly pursued by the ECB and the NCBs.

In Italy, Article 146 of Legislative Decree 385/1993 – the Consolidated Banking Law – is the primary point of reference. It formally recognizes the competence of the Bank of Italy in the field of payment systems.

The Eurosystem contributes to the efficiency, stability and security of payment systems through various measures, which include providing payment services, acting as a catalyst for cooperation between payment system operators, and carrying out standard-setting, regulatory and oversight activities as part of its supervisory function.

In the Eurosystem, the development of common procedures has been strongly encouraged in all of the three areas that make up a modern payment system.

In the area of large-value payments, in 2007 TARGET2 (Trans-European Automated Real-time Gross settlement Express Transfer system) replaced the first generation TARGET system that commenced operation in January 1999 after the launch of the euro. Payment transactions are now settled in real time in central bank money with immediate finality. Unlike the previous system, in which payments were settled by the NCBs on a decentralized basis, TARGET2 has a single platform shared by all the NCBs. This provides an enhanced, harmonized service and through economies of scale reduces costs per transaction and improves cost-efficiency. TARGET2 helps to reduce EU-wide systemic risk, i.e. the risk of contagion spreading to other areas owing to the large number and high value of transactions between banks.

In the field of retail payments, the Single Euro Payments Area (SEPA) was created in 2008. All cashless euro payments are treated as domestic, eliminating any differences between national and cross-border transactions.

In the context of securities transactions, in 2008 a project was launched to develop a single European technical platform (TARGET2-Securities) for the settlement of national and cross-border securities transactions in central bank money. The platform is being developed by the central banks of France, Germany, Italy and Spain (4CBs), which will also manage it when it becomes operational at the end of June 2015.

Finally, in March 2007 the Governing Council of the ECB decided to develop a single European platform to manage the collateral put forward by intermediaries in Eurosystem credit operations (the Correspondent Central Banking Model 2, or CCBM2, project).

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Banknotes and coins

On 1 January 2002, the euro banknotes and coins entered into circulation in the twelve countries then participating in the euro area (Belgium, Germany, Ireland, Greece, Spain, France, Italy, Luxembourg, Netherlands, Austria, Portugal and Finland), replacing their national currencies.

According to the rules and principles governing the issuance of banknotes and coins by the Eurosystem, the ECB has the exclusive right to authorize the issuance of banknotes within the EU, while both the ECB and the euro-area NCBs are issuers of euro banknotes.

In practice, however, the banknotes are issued by the euro-area NCBs as the ECB does not have an office for cash operations. Euro banknotes are therefore put into circulation and withdrawn by the NCBs via the banking system and to a lesser extent via the retail industry. The NCBs are responsible for ensuring that cash distribution systems in their respective countries function efficiently.

Banknotes are available in the following denominations: EUR 5, 10, 20, 50, 100, 200 and 500. The dimensions of the banknotes vary according to the value. The notes have advanced security features to protect against counterfeiting and to allow the general public to detect forgeries.

In 2013 the Europa series of euro banknotes began circulating. The various denominations will be introduced gradually over the next few years. The first denomination, the EUR 5 note, was put into circulation on 2 May 2013; the EUR 10 note was presented on 13 January and will begin circulating on 23 September 2014. The new series has innovative built-in security features.

The euro coins are issued by the euro-area countries. The ECB acts as an independent assessor of the quality of the coins and helps to develop and maintain a common system of quality assurance in all the euro-area mints. The volume of coins to be issued is approved each year by the ECB and the decision is published in the Official Journal of the European Union.

The coins are produced in the following denominations: 1, 2, 5, 10, 20 and 50 cents, and EUR 1 and 2. The have built-in innovative features to make them easily recognizable by the general public, particularly the blind and partially sighted.

The Principality of Monaco, the Republic of San Marino and the Vatican City State are also allowed to issue euro coins under a special agreement.

The euro banknotes and coins are legal tender throughout the euro area.

In order to ensure that the public has confidence in the single currency, the quality and integrity of the banknotes in circulation must be safeguarded. The ECB and the Eurosystem NCBs have therefore drawn up a framework for the detection of counterfeits and banknotes no longer fit for circulation that must be followed by banks and other professional cash handlers.

An automatic system for the collection and monitoring of data on counterfeits has been developed as part of the measures to combat the counterfeiting of euro banknotes.

On 1 January 2015 the euro is the currency of 335 million people living in the nineteen countries forming the euro area (Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxemburg, Malta, Netherlands, Portugal, Slovakia, Slovenia, Spain).

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Statistics

In accordance with Article 5 of the Statute of the ESCB/ECB, the ECB, assisted by the NCBs, collects from the competent national authorities or directly from economic agents the statistical information needed to conduct monetary policy in the euro area and perform the other tasks of the ESCB. The ECB also compiles statistics for the European Systemic Risk Board for the macroprudential supervision of the financial system.

Council Regulation (EC) No 2533/98 lists the legal and natural persons who are subject to reporting requirements, the provisions for enforcement, and the confidentiality rules.

The ECB imposes reporting obligations mainly by means of regulations and guidelines. The legal acts are drawn up by the Statistics Committee (STC), assisted by the Legal Committee (LEGCO), and are adopted by the Governing Council of the ECB. Each new request for data or substantial modification of existing requirements is first subjected to a detailed cost/benefit analysis.

The Eurosystem and the ESCB perform their statistical functions in close cooperation with the European Community institutions, in particular Eurostat, as well as with the national statistical institutes and relevant national and international organizations. They contribute to developing and disseminating international standards.

At the European level, the terms of cooperation with the European Commission (Eurostat) and the respective areas of responsibility are set out in a Memorandum of Understanding on economic and financial statistics.

The ECB has prime responsibility for money, banking and financial market statistics, and statistics on international reserves, nominal and real effective exchange rates of the euro, and quarterly financial accounts for the euro area.

Eurostat has prime responsibility for general economic statistics.

The ECB and Eurostat share responsibility for balance of payments statistics, for the preparation of quarterly non-financial accounts by institutional sector, and for data transmission standards.

The European Commission has prime responsibility for the annual accounts of the member states broken down by sector.

For the production of statistics, the NCBs collect data from the reporting agents and prepare the indicators for their respective countries. These are then transmitted to the ECB, which compiles the aggregates for the euro area.

The dissemination of the data also involves close cooperation between the members of the Eurosystem. As a rule, the ECB is responsible for disseminating euro-area statistics, while the NCBs disseminate the corresponding national data.

An application has been developed to make it easy for the public to find and view the whole range of data available. This application can be accessed from the websites of all the Eurosystem central banks and allows users to obtain euro-area aggregates and the corresponding national breakdowns for a selection of the main harmonized statistics.

A large part of the harmonized statistics compiled by the Bank of Italy as a member of the ESCB are available on the Bank’s website in the section ‘Eurosystem statistics: euro-area aggregates and national contributions’. This section contains statistical tables of the main monetary, financial, real and balance of payments indicators, showing both euro-area aggregates and national breakdowns for the individual countries.

The statistics are made available in real time for simultaneous publication throughout the Eurosystem. The data on the Bank of Italy’s website are therefore as up-to-date as those on the ECB’s website and the websites of the other NCBs.

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Financial stability and supervision

The Eurosystem contributes to the smooth conduct of policies by the competent authorities as regards the prudential supervision of credit institutions and the stability of the financial system.

On the basis of Article 127(6) of the Treaty on the Functioning of the European Union and of the Council Regulation (EC) No 1023/2013 (the “SSM Regulation”), the ECB is responsible for specific tasks concerning the prudential supervision of credit institutions established in participating Member States. It carries out these tasks within a Single Supervisory Mechanism composed of the ECB and the national competent authorities (NCAs).

The SSM’s three main objectives are to:

  • ensure the safety and soundness of the European banking system;
  • increase financial integration and stability;
  • ensure consistent supervision.

The SSM, which officially entered into operation in November 2014, is responsible for the supervision of around 4,700 supervised entities within participating Member States. To ensure efficient supervision, the respective supervisory roles and responsibilities of the ECB and the NCAs are allocated on the basis of the significance of the supervised entities. The SSM Regulation and the SSM Framework Regulation contain several criteria according to which credit institutions are classified as either significant or less significant.

The ECB directly supervises all institutions that are classified as significant, 123 groups representing approximately 1,200 supervised entities, with the assistance of the NCAs. The NCAs continue to conduct the direct supervision of less significant institutions, around 3,500 entities, subject to the oversight of the ECB. The ECB can also take on the direct supervision of less significant institutions if this is necessary to ensure the consistent application of high supervisory standards.

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Communication

Efficient external communication is an essential part of a central bank’s role as it contributes to the effectiveness and credibility of monetary policy. In order to increase the public’s understanding of monetary policy and other central bank activities, the ECB must be open and transparent. This is the main guiding principle for the Eurosystem in its external communication, which involves close cooperation between the ECB and the NCBs.

To make its communication effective the ECB and the NCBs use many different tools. The most important are:

  • regular press conferences after the first Governing Council meeting in each month,
  • publication of a Monthly Bulleting containing a detailed description of economic developments in the euro area and articles on topics relevant to the ECB’s activities,
  • public hearings of the ECB’s President and other members of the ECB’s Executive Board in the European Parliament,
  • speeches and interviews given by members of the ECB’s decision-making bodies,
  • press releases explaining the decisions and views of the Governing Council,
  • the websites of the ECB and the NCBs, which give access to all published material, including a very large collection of statistical data,working papers, and
  • occasional papers.

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