Monetary policy

What is monetary policy?

 Monetary policy concerns the set of decisions and measures taken by the monetary authority of a country – or, as in the euro area, a monetary union – to influence the cost and availability of money in the economy.

In the euro area, the conduct of monetary policy is entrusted to the Eurosystem, which comprises the European Central Bank (ECB) and the national central banks (including the Banco de España).

The ECB uses certain monetary policy tools to pursue its primary objective of achieving price stability. Its main tool in this respect is the setting of policy interest rates (for more information on these monetary policy tools, see Which monetary policy instruments are used by the ECB?). These interest rates establish the cost for commercial banks of borrowing money from the central bank and the remuneration that they obtain on deposits held with it. Consequently, changes in policy interest rates will affect the interest rates that commercial banks offer their customers on savings accounts and on mortgages and other loans. This, in turn, influences the saving, consumption and investment decisions of households and firms, thereby affecting aggregate demand and inflation.

This is just one of the many mechanisms through which monetary policy works. For more information on the transmission of monetary policy, see How does monetary policy work?.