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ECB monetary policy

In the euro area, the European Central Bank’s most important monetary policy decision are related to its key interest rates. The change in interest rates is a conventional monetary policy instrument and affects the interest rates on loans that commercial banks offer to their clients. This decision thus affects both consumption and investment by households and firms. Raising rates motivates people to save more and spend less, which can help cool the economy. Conversely, lowering interest rates motivates people to spend more or invest, thus supporting an increase in inflation towards the inflation target.

In periods of long-term low inflation and in an environment of low interest rates, the central bank’s ability to use this conventional monetary policy instrument is limited. In this case, central banks also use unconventional monetary policy measures, such as:

  • Asset purchase programme

    The asset purchase programme (APP) allows the central bank to significantly reduce long-term interest rates in the economy which are set by the financial markets, even though short-term interest rates have reached zero lower bound. Under the various programs, the ECB purchased various assets, including government bonds, securities issued by European supranational institutions, corporate bonds, asset-backed securities, and covered bonds.

    More on the ECB’s website.

  • Forward guidance

    Forward guidance is based on the central bank providing information on the future path of its monetary policy. This influences expectations in the economy and streamlines other monetary policy instruments used. The key to this tool is clear communication.

    More on the ECB’s website.

The success of maintaining price stability is closely linked to expectations in the economy. The central bank’s communication with the public is crucial for the correct development of expectations. Statements by the ECB’s President and members of the Governing Council shape expectations about the further development of the economic and monetary situation and may have an immediate effect on market interest rates and, indirectly, on the euro exchange rate. Expectations about future developments also affect wage bargaining or how companies determine the prices of their goods and services.