Keeping the value of money stable guarantees sustainable and stable economic development. Phases of excessive devaluation undermine confidence in purchasing power and cause an unjustified redistribution between debtors and creditors.

The European Central Bank (ECB) is committed to price stability. Its aim is to keep the inflation rate just under 2% in the medium-term. Overall the ECB has performed this task well, helping to ensure that the infant euro got off to a successful start. Primarily by setting the base rate, the Central Bank steers interest rates on the interbank market, the market on which the banks conduct their financial transactions with each other and with the ECB.

From the basic money supply thus made available to them, the banks use loans and purchases of securities to provide the money needed by individuals and companies in daily commerce. The challenge for the Central Bank is to choose the correct interest level to prevent too much money circulating in the economy, leading to inflation.

Markus Demary

Dr. Markus Demary

Senior Economist for Monetary Policy and the Economics of Financial Markets

Tel+49 221 4981-732

Maildemary@iwkoeln.de

@DemaryMarkus

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