To achieve certain economic mandates or goals, a country’s most potent weapon is monetary policy. Monetary policy is determined by a country’s central bank acting independent from government.
Monetary Policy is the process of setting the interest rate and controlling the supply of money.
There are three main goals that monetary policy helps a central bank achieve. Those being:
- Economic growth targets.
- Inflation in the target band.
- Low unemployment.
Hawkish monetary policy is indicative of rising interest rates. It is sometimes referred to as tightening because essentially the central bank is looking to tighten the economy and slow it down in the wake of higher inflation.
Under a hawkish scenario where interest rates are rising, the borrowing of money by both business and consumers becomes more expensive (due to higher interest repayments) so spending and investment decreases as a result.
Dovish monetary policy is the opposite, and indicative of falling interest rates. A central bank may decide to loosen monetary policy by cutting interest rates with the goal of stimulating a stagnating economy in mind.
Under a dovish scenario where interest rates are falling, money is being made cheaper and more accessible to business and consumers which encourages them to invest or spend. This spending then stimulates a stagnant economy.
By using the different types of monetary policy, a central bank can somewhat control, and in the end smooth the wild swings between the good and bad times experienced by an economy. Both economies and markets want stability and there is no point in experiencing huge booms if they are followed by equally as devastating busts in a regular business cycle.
More News Posts
US futures edge higher as focus shifts to job market
US equity futures opened modestly higher with the S&P 500…
Dollar edges to two-week high vs euro as US payroll data looms
The dollar climbed to a two-week top against the euro…
US futures tick lower as Nvidia earnings loom
U.S. stock index futures fell in evening deals on Tuesday,…
Asian stocks edge lower, China hit by Canada EV tariffs
Most Asian stocks fell on Tuesday, with sentiment towards Chinese…
Dollar sinks vs yen, hovers near 2-1/2-year low to sterling after Fed’s dovish shift
The yen rose to a three-week high against the dollar…
US stock futures steady as rate cut cheer grows
U.S. stock index futures rose slightly in evening deals on…
Australia’s central bank faces crunch time in resistance to rate cuts
Australia’s central bank is set to come under intense pressure…
China keeps loan prime rate unchanged after surprise cut in July
The People’s Bank of China kept its benchmark loan prime…
Dollar in holding pattern ahead of FOMC minutes, Powell comments
The U.S. dollar was struggling to make headway against its…
Japan July inflation likely picked up, boosting case for more BOJ rate hikes: Reuters poll
Japan’s consumer inflation rate likely picked up in July for…