Monetary policy tightening by the European Central Bank will bring inflation down to the target level : simply short

Abstract

Prices have been rising sharply across the euro area for an extended time already. This year, inflation, or the general rise in prices, has slowed because energy prices have fallen and the European Central Bank (ECB) has tightened its monetary policy significantly. This has involved the ECB raising its key interest rates and reducing the purchase programmes in which it acquires various assets in the markets. The ECB’s interest rate increases feed through to other interest rates in the economy, which increases the cost of borrowing and generally tightens financing conditions, reducing the overall level of demand. While curbing inflation over a short period, the ECB’s interest rate rises will also help to keep in check the expectations of businesses, consumers and investors regarding future levels of inflation.