Monetary policy implementation
Traditionally, the implementaton of monetary policy by the Eurosystem aims to steer short-term market interest rates by using the ECB’s key interest rates as anchorage points. Since the global financial crisis the aim has also been to maintain a more direct grip on longer-term market interest rates. In all cases, the implementation of monetary policy centres on the primary aim of maintaining price stability in the euro area.
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.
Traditionally, the Governing Council conducts the monetary policy of the Eurosystem by setting the interest rates on the liquidity provided (the ECB policy rates).The interest rates on loans granted by the Eurosystem steer the short-term money market rates. They also influence a number of other longer-term rates, such as those which credit institutions apply to their customers, and – more indirectly – exchange rates.. These financial variables in turn influence demand for goods and services in the economy and the level of prices and wages.
Since the global financial crisis, in view of the limits on the steering of short-term interest rates, the monetary policy conducted by the Governing Council has also been used to influence term premiums, and more directly longer-term interest rates. That is achieved by means of instruments other than just the key interest rates.
At all events, the Governing Council’s decisions aim to maintain price stability for the euro area as a whole. Its mode of action is thus countercyclical. Typically, if inflation is too low in relation to the target, monetary policy measures aim primarily to ease the economy’s financing conditions (interest rates are driven down) in order to stimulate the economy and, via a knock-on effect, to boost price dynamics. Conversely, if inflation is getting out of hand, monetary policy measures are used to tighten financing conditions (interest rates are driven up) in order to curb the boom in activity and contain the associated inflationary pressures.