Monetary Policy

Monetary policy is the central bank's steering wheel. Its main tool is the interest rate: raise it to cool things down, cut it to warm things up. Other tools include buying or selling bonds, changing how much banks must hold in reserves, and simply talking (forward guidance).

Most central banks aim for low, stable inflation, often around 2%, and some also target jobs. Because currencies flow toward higher returns, monetary policy is one of the biggest forces in forex. Get the rate path right and you have understood half of why a currency moves.