Monetary policy

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Monetary policy is the way a central bank manages money and interest rates in an economy. This article uses European examples.

Central banks in Europe

In the 1990s, each country in the European Union had its own central bank, and each issued its own national currency. The European Central Bank (ECB) interprets its aim of stable prices as yearly consumer price inflation of below but close to 2 per cent.

Tools

The ECB's most important tool is the main refinancing rate. This is the price at which ordinary banks can borrow money from their central bank. The money in circulation, together with the reserves that banks hold, is sometimes called the monetary base. Long ago, when money was made from gold, the monetary base was simply the gold coins in circulation.

Effects

Tighter monetary policy is likely to hold back investment. Lowering interest rates to help keep up output can help to steady the economy.

See also

• Fiscal policy
• Consumer price index
• Economic growth