Monetary Policy Implementation

Monetary policy relates to the central bank decisions that exert an influence on prices and the availability of money in the economy. These decisions alter the monetary policy stance, i.e. how expansive or restrictive it is at a particular moment.

The fundamental decision about the monetary policy stance in the euro area is the ECB’s decision on its key interest rates. Their level affects the interest rates that commercial banks charge their customers for lending and saving, for example. The money held by banks, i.e. balances in bank accounts, is convertible into central bank money. The banks borrow money from the central bank, for which reason the price of this money is the key to the setting of interest rates in the economy. The mechanism via which monetary policy decisions exert their influence, primarily via interest rates, on consumption, saving and investment, and on the general level of prices in the economy, is known as the transmission mechanism.

The key interest rates of Eurosystem monetary policy are the rate on the deposit facility, through which the ECB Governing Council steers the monetary policy stance, the rate on main refinancing operations and the rate on the marginal lending facility.

Decisions with regard to the monetary policy stance are taken by the Governing Council at its monetary meetings, which are generally held every six weeks. The decisions are announced on the ECB website.

The decision on the level of interest rates in the Eurosystem is transmitted into market interest rates through the use of the monetary policy instruments that are offered to banks and savings banks. Monetary policy instruments are used to manage the liquidity of the banking system. This is known as monetary policy implementation. It usually takes the form of short-term operations to provide or absorb liquidity (loans or deposits), but in case of need the Eurosystem may also use other instruments to intervene, including securities trading.