Definition of monetary transmission

Monetary transmission refers to the process by which a central bank’s monetary policy decisions are passed on, through financial markets, to businesses and households.

Since the financial crisis, borrowers around the world have not always felt the full benefit of central banks’ ultra low interest rates because of the poor health of banks on the high street.

In 2012, the problem has been particularly pronounced in the eurozone periphery, where businesses and households in countries such as Italy and Spain face dramatically higher borrowing costs than the ECB’s main interest rate of 0.75 per cent because their countries are so exposed to the eurozone crisis.

Borrowers in the periphery pay far more than their counterparts in “core” euro-area states, such as Germany. Eurozone policy makers are concerned that this could stoke opposition to the single currency in the bloc’s periphery. [1]

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