Monetary policy implementation

Monetary policy serves to steer money market interest rates with the aim of safeguarding price stability. Under exceptional circumstances, monetary policy makers adopt additional nonstandard measures to ensure that their interest rate policy is transmitted effectively to the economy.

The most important monetary policy tool is controlling money market interest rates. Via the transmission mechanism, the level of interest rates impacts on aggregate demand and hence on price developments.

In implementing monetary policy, central banks use specific instruments and procedures to stabilize money market interest rates at the level they deem appropriate. To this end, central banks manage the amount of available central bank money, signaling the targeted interest rate level. The euro area banking system can normally meet its demand for central bank money only with the Eurosystem, which is the monopoly supplier of euro banknotes and bank reserves. In defining the conditions for providing central bank money, the Eurosystem steers short-term money market rates. Under exceptional circumstances, it might not suffice to change the interest rate to meet the objective of preserving price stability. To this effect, central banks may use additional monetary policy instruments, so-called nonstandard measures.