First step: the price of reserves and short-term markets
Banks hold reserves at the central bank and borrow or deposit short-term funds as their needs change. ECB policy rates set the price of selected central-bank operations and anchor very short-term market rates. When that anchor moves, the cost of funding and the return on safe short-term assets change.
Markets look forward, however. A longer-term rate depends not only on today's decision but also on expected future rates, inflation, growth and risk. A ten-year fixed mortgage need not move by precisely the same amount on the same day as one central-bank rate. The lender also adds operating costs, credit risk, capital costs and a margin.
Several channels, not one pipe
The interest-rate channel changes the price of new credit and the reward for saving. The credit channel changes banks' ability and willingness to lend. Bond, equity and property prices can affect wealth and access to finance. The exchange rate can alter import and export prices. Central-bank communication shapes the expectations of households, firms and investors.
When credit becomes dearer, some households postpone buying a home and firms cancel an investment. A higher return on saving can encourage delayed consumption. Weaker demand then reduces pressure on capacity, wages and prices. Rate cuts may work in the opposite direction, but never mechanically: a floating-rate borrower, a saver and an exporter experience the same move differently.
- market rates and expectations
- bank lending and deposit rates
- asset prices and collateral values
- exchange rates and import prices
- consumption, investment, wages and final prices
Transmission is slow, variable and uneven
The ECB itself says transmission involves long, variable and uncertain lags. Existing loans may have fixed rates, firms may invest from retained earnings, and banks may pass changes to deposits and loans at different speeds. Energy, taxation, foreign demand and geopolitical shocks act at the same time. A later inflation move therefore cannot be assigned mechanically to a single meeting.
Policy also has distributional effects. Higher rates may help new savers but burden borrowers when their loans reset. They may cool asset prices, investment and employment. A central bank targets aggregate price stability, not each person's gain; decisions on helping a particular group with a particular cost primarily belong to elected governments.
Interest does not disappear in a Bitcoin economy
The Bitcoin protocol has no committee that sets a base interest rate. That does not imply zero interest. A person lending BTC gives up liquidity, accepts counterparty risk and may demand compensation. A market rate can emerge by agreement and may be extremely high when collateral or enforceability is weak.
Bitcoin's fixed issuance removes one monetary-policy channel, not the business cycle, credit losses or shifts in money demand. A society with a harder monetary rule would have less scope to stabilise conditions through base-money supply; more adjustment would fall on prices, wages, defaults and private buffers. Some value that commitment, while others see reduced flexibility as a serious cost.