Monetary policy

Monetary policy is the steering of the economy by the central bank – in the eurozone by the ECB.

The main goal: price stability – i.e. an inflation rate of approx. 2%. Not too high (loss of purchasing power), not too low (risk of deflation).

The tools:

1. Key interest rate:

• Raise the rate → loans become more expensive → less consumption → inflation falls
• Cut the rate → loans become cheaper → more consumption → the economy is stimulated

2. Bond purchases (quantitative easing):

• The ECB buys government bonds → pumps money into the market → interest rates fall
• 2015–2022: the ECB bought over 4 trillion euros of bonds

3. Minimum reserves:

• Banks must deposit part of their deposits with the ECB
• An increase → less money in circulation

Relevant for you: the ECB's interest rate decisions DIRECTLY affect your overnight money interest, loan costs, property prices and equity returns.