Monetary policy is very crucial when it comes to financial news. By extension, it is also important when it comes to trading. Therefore, understanding what monetary policy is is important for any trader. Here, why shall explain what monetary policy is.
What monetary policy is
Monetary policy refers to what several financial institutions plan to do with the economy. This includes the central bank, currency board, and others.
A central bank will, for example, put policies in place to help keep the economy stable. They can artificially boost or cut interest rates. The reason for this is to control inflation. By controlling inflation, countries can avoid having their country fall further into economic hardship. There can be many other policies for many other reasons, though.
Contractionary policy
A country growing too quickly economically can be as much of a problem as a contraction. Things can soon get overwhelmed, resulting in a worse contraction in the future. Therefore, governments will sometimes artificially damper their economy.
Countries will therefore start printing more money. This will result in higher inflation, as there is a higher amount of money in the system in a short period of time. They also increase interest rates, making loans less desirable. This forces people to invest less and slows down the economy.
This may result in higher unemployment rates as well, but the alternative could be worse.
Expansionary policy
This type of policy helps in aiding the economy, boosting it if need be. If there has been particularly high unemployment or a recession, this is the way to go.
Authorities will try to lower the interest rates if they can. By doing this, they lower borrowing costs. Once borrowing costs are lower, people are likely to spend more and invest more money. This is because they can take loans easily, with which they start investing in the economy. This should help get companies and businesses going again.
