Central bank decisions have direct financial consequences for many consumers, particularly for those with mortgages. They also affect household savings and consumption. However, research suggests that most consumers only partly incorporate changes in interest rates into their decision making – and this has implications for the effectiveness of monetary policy.
At the beginning of the 20th century, governments were increasingly aware of the importance of controlling inflation to sustain economic growth and to prevent depreciation of their currencies. To do this, they needed more money – and so ordered their national central banks to print it. This led to the rise of the modern central bank.
Today, the Governing Council of the ECB makes monetary policy decisions based on the latest economic, monetary and financial developments. It does this by evaluating different scenarios of inflation and risk to the economy. The Governing Council then weighs the benefits and risks of various policy measures and their interaction with one another, aiming to achieve price stability over time.
The Governing Council is supported in its work by a wide range of research and data sources, including the ECB’s staff projection and the MPRC. It is also informed by the results of our Business Outlook Survey, which is published four times a year and covers the views of firms on a variety of issues.
The ECB also uses macroprudential tools to contain risks to the financial system. These include monitoring financial stability risks and ensuring that financial institutions are well-capitalised. We do this by collecting and analyzing relevant data and, when necessary, arranging for reviews of the ECB’s functions by independent experts.