Monetary policy rests on the relationship mypanera mypanera between the interest rate in an economy, which is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly publishing, or where there is a system governed issuing currency through banks associated with the central bank, the monetary authority has the ability to change the money supply and thus influence the interest rate (to achieve policy goals). It is important for policy makers to make the announcement credible. If private agents (consumers and firms) believe that policymakers are committed to lowering inflation, they will anticipate future price is lower than that (how expectations are formed is an entirely different thing, for example, comparing the rational expectations with adaptive expectations ).
If an employee expects prices to be high in the future, he will make wage contract with a high wage to match the prices. Therefore, expectations of lower wages is reflected in wage-setting behavior between employees and employers (lower wages because of the expected lower prices) and because wages are in fact lower there is no demand pull inflation because employees receive lower wages and no charges inflationary pressures because the employer pays less than wages.
To achieve low inflation, policymakers must have credible announcements, that private agents must believe that these announcements will reflect actual future policy. If the announcement about the low level of inflation targets is made but not believed by private agents, wage setting will anticipate high inflation and wages will be higher and inflation will rise. A high wage will increase consumer demand (demand pull inflation) and the cost of a company (cost push inflation), so inflation increases. Therefore, if the announcement of a policy maker of monetary policy can not be trusted, the policy will not have the desired effect.