Monetary policy implementation

In order to achieve its primary objective of maintaining price stability, the Eurosystem steers short-term money market rates by signalling its monetary policy stance through its decisions on key interest rates and by managing the liquidity situation in the money market.

The Eurosystem is in some ways the "bankers' bank" in the euro area, as euro area credit institutions have to borrow liquidity from the Eurosystem in order to meet the demand for banknotes and to constitute (required) reserves at national central banks.

Setting the interest rates on the liquidity provided  (policy rates) is the primary way in which the Governing Council conducts the monetary policy of the Eurosystem.

The decisions of the Governing Council are taken with a view to maintaining price stability for the euro area as a whole. If inflationary risks emerge, the Council will adopt a more restrictive policy by raising interest rates. Conversely, if deflationary risks arise, interest rates will be lowered.

The interest rates applied to the credit granted by the Eurosystem greatly influence money market rates. They also influence a number of other interest rates such as those applied by commercial banks to their customers and, more indirectly, exchange rates. These financial variables in turn have repercussions on the demand for goods and services in the economy, as well as affecting prices and incomes.