Money and Interest Rate - How the central bank controls the nominal interest rate - How the ECB controls interest rates
4 important questions on Money and Interest Rate - How the central bank controls the nominal interest rate - How the ECB controls interest rates
The Governing Council of the ECB has direct control of only one interest rate, known as the main refinancing rate, which is:
The inter-bank market provides the link between the ECB's refinancing rate and the interest rates that firms and households earn of saving or pay to borrow. This is:
The ECB influences the overnight inter-bank rate by offering commercial banks alternatives to the inter-bank market. These alternatives are known as the ECB's:
- Marginal lending facility: a facility that enables commercial banks to borrow reserves from the ECB, which puts a ceiling on the inter-bank rate.
- Deposit facility: a facility that enables commercial banks to deposit excess reserves with the ECB, which sets a floor for the inter-bank market.
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The EONIA (European Over-Night Index Average) is:
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