Monetary policy is transmitted to the economy in many different ways. Monetary policy operations affect the liquidity of the banking system and the shortest money market rates. Price formation on the financial markets is reflected in banks' lending and deposit rates and in long-term market rates. In addition, monetary policy has an indirect effect on asset prices, monetary aggregates and lending volumes, inflation expectations, inflation and other macroeconomic developments.
Monetary policy is primarily implemented by steering the development of market interest rates. Market rates have an impact on the price of finance, and therefore on macroeconomic developments. The main tool for the Eurosystem to have an influence on market rates are credit operations, where money is lent to banks within the euro area. In circumstances where banks have more money on their accounts with the central bank than the minimum reserves set for them, the interest rate applied on central bank deposits starts to play a key role in steering interest rates.
In addition to credit operations and receiving deposits, monetary policy instruments include outright securities transactions. The role of these instruments is emphasised in circumstances where the operation of market segments usually playing a key role in the transmission of monetary policy has been undermined, or where additional easing of financing conditions is materially hindered due to the low general level of interest rates.
The monetary policy stance is based on the Governing Council’s judgement at any one time of the risks to price stability in the euro area.