Central bank decisions are often the subject of much attention, interest and debate. They affect you and your business in many ways: Interest rates impact borrowing costs and investment decisions; inflation impacts purchasing power and pricing; financial stability influences access to credit; and exchange rate changes can influence import/export and trading opportunities.
Ultimately, central banks are designed to ensure the stability of the financial system. They therefore must make monetary policy decisions independently of the political group in power. This helps to prevent them from acting on short-term political objectives and to protect the integrity of the financial system.
Monetary policy is primarily determined by setting short-term interest rates. Central banks set these rates not to “like” one level of interest rates versus another but as a means to exert whatever influence they have over dimensions like prices and inflation, output and employment and designated monetary aggregates (e.g., the quantity of deposit money).
Every year, a central bank decides to raise, maintain or lower its policy interest rate eight times. These monetary policy decisions are informed by the Bank’s research on economic and financial conditions, including its forecasts of growth and inflation over two years. The decisions are accompanied by the Monetary Policy Report (MPR).
In addition to setting interest rates, central banks may use other tools, such as increasing or decreasing reserve requirements to change how much cash is available to businesses and consumers or purchasing assets, such as mortgage-backed securities, to encourage lending. They also communicate their economic outlook to the public to manage expectations and enhance transparency.