Monetary Policy

The main objective of monetary policy - price stability

The primary objective of monetary policy in the euro area is price stability, which implies avoiding prolonged inflation and deflation.  Price stability is an important precondition for business certainty and the sustainable growth of an economy. It supports investment and employment, while also increasing economic welfare. In the euro area, price stability is defined as an inflation rate of below, but close to, 2% over the medium term. 

The European Central Bank (ECB) seeks to maintain price stability through changes in interest rates, which affect saving and investment decisions of households and firms. Generally speaking, a rise in interest rates will discourage spending as higher interest rates make it more costly for economic agents to borrow, while encouraging saving. Although with a time lag, the resulting restraint in expenditure weakens aggregate demand and thus dampens inflation.  

In addition, since 2009 the ECB has implemented several non-standard monetary policy measures, involving forward guidance and asset purchase programmes, to complement its standard monetary policy measures, particularly when nominal interest rates approached zero.