Monetary policy
Central banks regulate the money supply and interest rates in the economy. Monetary policy plays a key role in maintaining economic stability and promoting economic growth. Finland is part of the euro area, which has a single monetary policy managed by the Eurosystem. As a member of the Eurosystem, the Bank of Finland participates in preparation of the single monetary policy, related decision-making and implementation in the euro area. The main objective of Eurosystem monetary policy is to maintain price stability in the euro area and thereby safeguard the purchasing power of the euro.
The task of monetary policy is to ensure that inflation – i.e. the increase in the prices of goods and services – remains predictable and stable. Price stability is the primary objective of the Eurosystem.
Price stability can be defined as a situation where there is no need for consumption and investment decisions to take into account changes in the general level of prices. Price stability is important for all our finances. It is easier to plan how to spend money when prices and the value of our savings remain more or less unchanged. Where there is price stability, inflation is moderate and predictable. Ensuring price stability is the best way for Eurosystem monetary policy to promote a favourable economic environment and high employment.
Monetary policy ensures that the increase in the prices of goods and services remains predictable and stable.
Rapid inflation and deflation are economic phenomena that have adverse impacts on the economy. Inflation is defined as a general increase in the prices of goods and services that results in a decrease in the value of money, i.e. a decline in purchasing power. Deflation is defined as the opposite of inflation, in other words a situation where there is a continuous fall in the general level of prices.
Inflation is measured by the Harmonised Index of Consumer Prices (HICP), which is calculated in the same way in all EU countries. In addition to the HICP, attention is paid to the prices of owner-occupied homes. Monetary policy decisions are based on precise assessments of the risks that, if realised, could accelerate or decelerate inflation. Climate change is also taken into account in this analysis.
The aim of the Eurosystem’s monetary policy strategy is an inflation rate of 2 per cent over the medium term. The target is symmetric, which means that it considers that both negative and positive deviations from this target are equally undesirable.
