The euro sign in Frankfurt am Main

Monetary policy

The Bundesbank’s core business area is monetary policy. In cooperation with the European Central Bank (ECB) and the other euro-area central banks – which together form the Eurosystem – the Bundesbank has been given the mandate of maintaining price stability. The Bundesbank President is a voting member of the Governing Council of the ECB and takes part in the monthly monetary policy decision-making process. In doing so, he draws on the expertise of the Bundesbank’s economists, statisticians and monetary experts.
A stable currency is the foundation of a healthy economy. It protects savers and income earners from the erosion of wealth while promoting growth and employment. The Governing Council of the ECB defines price stability as an increase in the euro area’s average price level of below but close to two percent compared with the previous year. With the help of monetary policy measures, the Eurosystem indirectly exerts influence on general price developments. For this purpose, it changes the cost at which commercial banks can obtain cash and credit from the Eurosystem by altering the key interest rate. In so doing, it influences both the interest rates at which commercial banks lend money to each other and credit conditions for households and enterprises. Because the level of lending rates generally plays an important part in purchasing and investment decisions, monetary policy measures affect aggregate demand and ultimately also price developments.

The Eurosystem has a range of monetary policy instruments at its disposal. Of key importance are what is referred to as open market operations, through which the central banks of the Eurosystem give money to commercial banks for a certain period of time in return for collateral. The main refinancing operations which are offered weekly and run for seven days are at the centre of these open market operations. The key interest rate, which determines the monetary policy stance, applies to these operations.

The Bundesbank plays a major role in the technical aspect of settling the refinancing operations of the Eurosystem as well as in inspecting and managing the collateral. In addition, Bundesbank experts provide information on the monetary policy of the Eurosystem and comment on economic and fiscal policy issues in interviews and background discussions as well as at trade fairs and on the internet.