When the monetary policy transmission mechanism functions, then decisions on the official interest rate, in the case of the ECB the minimum bid rate in main refinancing operations, appropriately affect inflation and economic activity through various channels, in line with the established standard empirical relationships. The starting point of the monetary policy transmission mechanism is the overnight interbank market.
From there, interest rates are transmitted along the yield curve, also through the formation of expectations, to longer-term interest rates. Furthermore, banks and other financial market participants, pass on money market interest rates to households and businesses, thereby affecting economic activity.