ECB reviews interest rates every month

Interest rates are tools of monetary policy, and probably represent the most dramatic effect of the European Central Bank's (…

Interest rates are tools of monetary policy, and probably represent the most dramatic effect of the European Central Bank's (ECB's) existence on the everyday lives of Irish people.

The ECB reviews interest rates on a monthly basis, according to how its board views the strength or weakness of the euro-zone economy, which is taken as a whole.

Among the factors which influence this decision-making process are the activities of euro-zone consumers and businesses. Specifically, the ECB, under the stewardship of president Mr Wim Duisenberg, keeps a close eye on how much people are spending or saving.

If the board believes that consumers are spending more or at a faster rate than might be beneficial for the economy, they will fear rising inflation.

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In order to combat this, they could raise interest rates, thus making it more expensive for consumers to borrow and discouraging them from spending more than they should.

The flipside also rings true, with a reduction in interest rates seen as the conventional route towards stimulating an economy. If it is cheaper to borrow, consumers will have more money in their pockets - cash that will be spent and will drive an economy forward.

The ECB rate stands at 3.25 per cent and is likely to remain unchanged in the near term.

Úna McCaffrey

Úna McCaffrey

Úna McCaffrey is Digital Features Editor at The Irish Times.