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Central banks and rates

The European Central Bank sets the rate that everything else in the euro area is priced from.

One rate

Every six weeks the ECB decides the rate banks earn on money left with it. Banks then lend to each other, to companies and to you at rates built on top of it, so a change reaches loans, savings and bonds.

Why it moves

The ECB raises its rate to slow prices down when inflation is above its 2% aim, and cuts it when the economy is weak and inflation low. It looks ahead, so it often moves before the numbers show the change.

What it does to prices

Higher rates make borrowing dearer, savings more attractive and future profits worth less today. Bond prices fall and shares often struggle. Lower rates do the opposite. Markets react to the surprise, not to what was expected.

Reading it

Portfolio’s World page shows the ECB’s rate next to inflation, with the dates of the next meetings in Coming Up. What markets expect is already in prices; a move that was expected often changes little.

Key takeaways

  • The ECB’s rate is the base for euro rates.
  • It rises to cool inflation and falls to support growth.
  • Markets move on surprises, not on expected decisions.