What is monetary policy?
Monetary policy refers to all the decisions and rules by which a central bank influences the money circulating in an economy. The European Central Bank (ECB) can use its policies to control how much money is in circulation, and also how much money "costs", in other words: interest rates.
Monetary policy is very important. Citizens benefit greatly from a reliable, stable currency that maintains its value. They must be confident that the euros in their wallets and bank accounts will allow them to do their grocery shopping tomorrow, and also in five years. Ensuring that price stability is the ECB's job.
For monetary policy to be effective, it is important that central banks can take decisions independently, without any government interference, for example. Elected politicians should not be able to pressurise the central bank into pursuing policies that please their constituents.
Regulations stipulates that the ECB or national central banks like De Nederlandsche Bank (DNB) may not seek or receive instructions from member state governments, EU bodies or anyone else. Their political independence allows the central banks to focus entirely on their mission: price stability.
The ECB's Governing Council takes decisions on interest rates. DNB President Klaas Knot has a seat on the Council, as do the governors of the other euro area central banks and the members of the ECB's Executive Board. This board meets every six weeks to discuss monetary policy.
While the ECB is independent but accountable to the European Parliament and the European Council. Monetary dialogues are held every three months between the ECB President and the European Parliament's Committee on Economic and Monetary Affairs.
Target: 2% inflation
The price stability sought by the ECB's monetary policy includes a 2% inflation rate across all euro countries combined.
This is because our economy works best when prices are stable. Inflation that is too low, with prices barely rising over time, is just as undesirable as inflation that is too high, with large price increases. Scholarly research and practice have shown that 2% inflation works best for our economy.