Inflation targeting

Central banks aim for a specific inflation rate, usually 2%

Inflation targeting is a monetary policy where central banks set and publicly announce an inflation target, usually around 2%, to maintain price stability and support long-term economic growth. Central banks adjust short-term interest rates to control inflation, raising them to cool the economy when inflation is above target and lowering them to stimulate the economy when inflation is below target.

Example

New Zealand, Canada, and the United Kingdom adopted inflation targeting in the early 1990s, while Germany had implemented many elements of it earlier. As of 2024, 45 countries and the Euro Area use inflation targeting as their monetary policy framework.

Inflation targeting helps central banks manage economic stability by adjusting interest rates based on inflation levels, ensuring long-term growth and price stability.

Related concepts

Dual mandate (disambiguation)

Federal Reserve's dual mandate focuses on maximum employment and price stability

Quantitative easing

Central banks buy assets to increase money supply

Reserve requirement

Reserve requirements mandate minimum cash holdings for banks

Money supply

Money supply influences inflation

Discount rate

Discount rate is the interest rate the Fed charges banks for emergency borrowing

Liquidity trap

Interest rates near zero lower bound

Educational content, not financial advice.

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