“Economists agree that the next move by the central bank will be a tightening of
ID: 1152925 • Letter: #
Question
“Economists agree that the next move by the central bank will be a tightening of monetary policy. But they have produced wildly varying forecasts for the timing of that move from as early as February 2015 (Commonwealth Bank of Australia) to as late as the first quarter of 2016 (Bank of America Merrill Lynch).”
The Sydney Morning Herald, September 3, 2014 http://www.smh.com.au/business/the-economy/rates-are-on-hold--but-for-how-muchlonger-20140904-10butu.html#ixzz3DzlAC3vl
How would the Reserve Bank achieve the “tightening of monetary policy” referred to in the statement?
Explanation / Answer
The reserve bank achieves the tighting of monetary policy by this:1.open market operations.2.increasing rates of interest. 3.increasing margins etc. Tight monetary policy implies the Central Bank (or authority in charge of Monetary Policy) is seeking to reduce the demand for money and limit the pace of economic expansion. Usually, this involves increasing interest rates.
The aim of tight monetary policy is usually to reduce inflation.
With higher interest rates there will be a slowdown in the rate of economic growth. This occurs due to the fact higher interest rates increase the cost of borrowing, and therefore reduce consumer spending and investment, leading to lower economic growth.
Tight monetary policy can also be termed – deflationary monetary policy.
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