Monetary policy concerns the decisions taken by a central bank, within its mandate, to influence the cost of borrowing and the amount of money in the economy.
In the euro area, the most important decision of the European Central Bank (ECB) is usually to set the key interest rates. If necessary, the ECB may decide to use other instruments.
Monetary policy is used to influence changes in the prices of the goods and services we consume.
The ECB’s primary objective is to maintain price stability in the euro area. This means making sure prices do not increase a lot or have large fluctuations, i.e. ensuring that inflation is low and stable.
The ECB sets monetary policy aiming for 2% inflation over the medium term.
When setting monetary policy, the ECB also takes into account concerns over economic growth and employment, financial stability and climate change, provided they do not harm price stability.
The authority responsible for monetary policy in the euro area is the Eurosystem — the ECB and the national central banks of the 19 euro area countries, which includes the Banco de Portugal.
The Governing Council of the ECB sets monetary policy for the euro area as a whole.
The Executive Board of the ECB implements the Governing Council’s decisions, giving the necessary instructions to the national central banks.
The Executive Board includes the President of the ECB, the Vice-President and four other members.
The national central banks implement monetary policy in the euro area countries in accordance with the Executive Board’s instructions.
As part of the Eurosystem, the Banco de Portugal has monetary policy responsibilities:
The central bank does not influence the prices of goods and services directly.
The central bank makes use of monetary policy instruments (e.g. key interest rates) to try to influence household and business spending and thereby the prices of goods and services. It may take several quarters until a monetary policy decision is fully reflected in prices.
Therefore, before making decisions, the ECB has to be well informed about what is happening to economic growth, employment and inflation and what is likely to happen in the future.
The ECB makes decisions based on an integrated analysis of all information. The reasons behind each decision are explained in “Monetary policy statements at a glance”
Monetary policy affects our daily lives, whether we are aware of it or not.
It affects the decisions we make about how much to spend, save or borrow.
Trusting that prices will remain stable helps us make better decisions. It means that we can be sure that, with the same amount in euro, we can buy tomorrow practically the same we bought today.
Price stability creates better conditions for economic growth and job creation, increasing the well-being of citizens.