Central bank and key interest rate

In short: The central bank (in the euro area the ECB) controls the money supply and price level. Its most important tool is the key interest rate at which commercial banks borrow money.

In more detail: The ECB’s main goal is price stability, i.e. about two percent inflation in the medium term.

In detail

• High rate: Loans get more expensive, consumption and investment fall, inflation falls.
• Low rate: Loans are cheap, the economy is stimulated.
• Savers and borrowers: Rising rates help savers and burden mortgages (zinseszins).
• Other means: Securities purchases (bond buying), minimum reserves.
• Independence: Central banks should be independent of day-to-day politics.
• Banking supervision: It helps keep banks stable.
• Effect: With delay, often several months (konjunktur-und-arbeitslosigkeit).