Central banks explained: what the ECB does

A central bank is the institution that manages a country’s or a currency area’s money. For the 20-plus countries that use the euro, that is the European Central Bank (ECB) in Frankfurt. It does not lend to households or companies. It sets the price of money for the banks that do.

The ECB’s job: keeping prices stable

The ECB’s main task, written into EU law, is price stability. Since 2021 it defines this as inflation of 2% over the medium term, and it treats the target as symmetric: inflation persistently below 2% is seen as just as unwelcome as inflation above it.

“Medium term” matters. The ECB does not try to hit 2% every month, which would be impossible. It tries to steer inflation back towards 2% over a period of a few years.

The three key rates, in plain words

The ECB’s main tool is the interest rate on money it lends to, or holds for, banks. It sets three of them:

Rate	What it is	In plain words
Deposit facility rate	What banks earn on spare cash left with the central bank overnight	The floor: no bank lends to another for much less than this
Main refinancing rate	What banks pay to borrow from the central bank for a week, against collateral	The middle of the range
Marginal lending facility rate	What banks pay to borrow overnight in a hurry	The ceiling: a penalty rate for last-minute cash

Together they form a corridor for the rates banks charge each other. Banks in the euro area hold a lot of spare cash, so the rates they charge each other for very short loans sit close to the floor. The ECB has said it steers its policy through the deposit facility rate, which is why our interest rates chart shows it.

Who decides, and how often

Decisions are taken by the Governing Council: the six members of the ECB’s Executive Board plus the governors of the euro area’s national central banks, including the Banco de Portugal. Voting rights rotate among the national governors.

The Council takes monetary policy decisions every six weeks. Each decision is published as a short statement and explained at a press conference the same afternoon. A few weeks later the ECB publishes an account of the discussion.

How a rate change reaches you

A rate decision affects banks first, then spreads out:

1. Money markets react, often before the decision, because traders price in what they expect. The best-known measure is Euribor, the rate at which banks in Europe can borrow from each other without collateral for 1 week to 12 months.
2. Variable-rate loans follow Euribor. Many Portuguese home loans are variable: the interest is Euribor (often the 3, 6 or 12-month rate) plus a fixed margin called the spread. On each reset date in the contract, the payment is recalculated using the new Euribor. That is why ECB moves are felt quickly in Portugal.
3. Savings rates follow, usually more slowly. Banks tend to raise deposit rates later and less than loan rates, and lower them sooner.
4. The wider economy reacts over a year or more: dearer borrowing cools spending and investment, which in time eases price pressure. Cheaper borrowing does the reverse.

A central bank cannot fix a price shock overnight. Rate changes work with a long and uneven delay, which is why decisions are based on where inflation is expected to be, not only where it is today.

The US Federal Reserve, for comparison

The Federal Reserve (Fed) is the United States’ central bank. Unlike the ECB, it has a dual mandate: stable prices and maximum employment. It also aims for 2% inflation, measured with a different price index. Its rate-setting committee, the FOMC, holds eight scheduled meetings a year and sets a target range for the federal funds rate, the rate US banks charge each other overnight. Because the dollar is the world’s main currency, Fed decisions move markets everywhere, including the euro–dollar exchange rate.

See the latest ECB and Fed rates next to the inflation figures they respond to, and read how rates move bond prices and yields.