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The ECB main refinancing rate is the most important benchmark rate in the eurozone, affecting bank borrowing costs and economic activity across the eurozone. The central bank adjusts this rate to regulate inflation and economic growth.
The ECB sets inflation targets around 2%, achieving this target by adjusting the main refinancing rate. When inflation is above target, rates are raised; when below target, rates are cut.
The ECB's policy influences the Eurozone economy by affecting bank lending costs, business investment, and household consumption. Its changes transmit to short-term rates like the German 2-year and 5-year government bonds, impacting economic activity across the entire Eurozone.
There is a close interplay between the ECB's and the Fed's interest rates. Policy changes by the Fed affect global capital flows and the US dollar exchange rate, posing policy challenges for the ECB. The coordination, or lack thereof, between their policies is crucial for global financial stability.
