Monetary policy, describes the actions of a country’s central banks. Interest rate policy generally focuses on growth and price stability. The central bank of a country generally controls monetary policy. Central banks also usually oversee the commercial banking system of their respective countries.
Central banks are often charged with enhancing economic growth and employment by stimulating an economy with monetary policy. This process usually involved reducing interest rates, making it easier consumers to borrow from banks.
When inflation increases beyond a pre-determined targeted range for maximum growth, central banks will increase interest rates in an effort to dampen price pressures.
The currency markets are easily influenced by monetary policy as changes to interest rates will change the demand for a currency. Although monetary policy only directly affects short term interest rates, the future outlook of the central bank will influence market sentiment which drives longer term interest rates.