Saturday, 7 May 2011
Why is it necessary for interest rates to be set centrally in a monetary union?
In a monetary union such as the eurozone, interest rates are always set by a central bank and the rate they choose applies for the whole area. The reason the rate has to be the same in each country is because if one country had a higher rate of interest than all of the others, then it could well lead to a lack of convergence of the economic cycles, as high levels of interest rates would restrict growth in one economy where another economy may have low levels and be growing quickly. The reason given by the ECB is that it is in their interest to promote "Price Stability" and a single interest rate makes this much easier, mainly because interest rates are a tool used to control inflation.