Monetary policy refers to the actions and strategies implemented by a country’s central bank or monetary authority to manage the supply of money and interest rates in the economy. The primary goals of monetary policy are to achieve economic stability, control inflation, promote employment, and foster sustainable economic growth.
Monetary policy can be classified into two main types: expansionary and contractionary. Expansionary monetary policy involves increasing the money supply and lowering interest rates to stimulate economic activity, particularly during periods of recession or economic slowdown. Conversely, contractionary monetary policy entails decreasing the money supply and raising interest rates to curb inflation and prevent an overheating economy.
Central banks use various tools to implement monetary policy, including open market operations, which involve the buying and selling of government securities; the discount rate, which is the interest rate charged to commercial banks for loans from the central bank; and reserve requirements, which dictate the amount of funds banks must hold in reserve against deposits. Through these mechanisms, monetary policy influences borrowing, spending, and investment decisions, thereby impacting overall economic performance.
The ECB faces a critical decision at its upcoming policy meeting, potentially implementing a fifth consecutive interest rate cut. Amid sluggish growth and easing inflation, the ECB aims for a…