Monetary Policy: Definition, Meaning and Examples

nounEconomicsalso monetary policies, monetary policy decision, monetary policy stance

In simple terms

Monetary policy is how a central bank steers an economy by changing the cost of money.

Its main lever is a short-term interest rate. Move that rate and the cost of mortgages, business loans and savings tends to move with it.

How it works

A committee meets on a fixed schedule and votes. The Bank of England’s Monetary Policy Committee has nine members and decides eight times a year, roughly every six weeks. Each member gets one vote, and the Governor breaks a tie.

Raising the policy rate makes borrowing dearer, cools spending and tends to slow price rises. Cutting it does the opposite. Central banks also use open market operations, collateral requirements, standing facilities and asset purchase programs.

Most now work to a numeric inflation target. The European Central Bank and the Bank of England both aim at 2 percent. Who sets that number differs: in the United Kingdom the target is set by the government, not by the bank.

Mandates differ too. The ECB’s main aim is price stability, on the view that stable prices are the best contribution monetary policy can make to growth. Other central banks are also told to weigh employment or the exchange rate.

Because the UK target is defined over the medium term, decisions turn on where inflation is expected to go, not only on the latest monthly reading.

Why it matters

Monetary policy reaches almost every household. It shapes what a mortgage costs, what savings earn, and how quickly wages lose purchasing power.

It is also one of the few economic levers that can be pulled quickly, without a vote in a legislature.

Where you’ll see it

Rate announcements and the coverage that follows them.
Mortgage and savings rates that shift soon afterwards.
Currency markets reacting to a decision, or to a hint of one.
Budget debates, where monetary policy is set against fiscal policy.

Example

In September 2026 the Bank of England’s Bank Rate stood at 3.75 percent, with the next decision due on 17 September.

Often confused with

Fiscal policy. Fiscal policy is what a government does with taxes and spending. Monetary policy is what a central bank does with money and interest rates.

Key facts

The Bank of England defines monetary policy as action a country's central bank or government can take to influence how much money is in the economy and how much it costs to borrow.¹
The Bank of England's main tool is Bank Rate, the interest rate paid on deposits eligible firms hold with it overnight; it stood at 3.75 percent as of September 2026.¹
The UK inflation target is 2 percent over the medium term and is set by the government; the nine-member Monetary Policy Committee decides eight times a year, roughly every six weeks.¹
The ECB's main aim is price stability, with a 2 percent inflation target, on the view that price stability is the best contribution monetary policy can make to economic growth.²
Beyond steering interest rates, the ECB uses open market operations, collateral requirements, asset purchase programs and standing facilities.²

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