Monetary policy is a fascinating topic, it is not merely some thought from the very pages of an economics monograph. Consider it as an implement similar to the general work plan of the central bank, something that is meant to help chart the course through the economic sea at times turbulent. It is perhaps the bank’s means of inducing, leading, and sometimes even coaxing banks into maintaining our financial vessel afloat and moving in the right direction.

Monetary Policy

Monetary policy is, at its core, the process of regulating the availability of money and credit towards the realization of some rather lofty objectives such as inflation control, employment and economic growth. It should be noted that the central bank possesses an extensive array of fascinating tools at its disposal in order to accomplish this:

Interest Rate: 

Jujitsu is an article in which the central bank is compared to a martial artist to both speed up and control the economy using interest rates. Lower rates? That’s like a shot in the heart, recommending people to borrow and lend in order to create circulation. Higher rates? Therefore, you may think of it as the equivalent of putting on the handbrake which slows down the process of inflation.

Reserve Requirement Rhythms: 

This is the fundamental rate that the central bank imposes the amount of money that banks are required to maintain in their reserves. Doing this can either increase or decrease the amount of funds that are available to extend to borrowers which is similar to adjusting the volume of economic activity.

Forward Guidance Forecasts: 

The central bank engages in buying or selling of government securities and this process involves putting money in or taking out of the economic system as in a magician’s hat. Liquidity just like the name suggests is the control of cash in order to avoid a shortage of money in the bank and hence a shortage in the functioning of the banks.

How Banks Decode the Monetary Policy Map

Well, in how much detail do banks employ this monetary policy plan?

1. The Cost of Money: The monetary policy as influenced by policy rates causes changes in the interest that banks use when borrowing money, hence, the interest they offer to borrowers for loans and mortgages.
2. Lending Confidence: Monetary policy makes people sure about the economic scenario being portrayed by the central bank. Is it: Full speed in ahead or advance slowly with caution? These act as signals that guide the banks on the level of credit they should offer where the rates of credit offered increases whenever everything looks positive.
3. Direct Impact on Investment Decisions: Banks are very strategic investors, and the monetary policy determines the areas of investment particularly in fixed income securities. They are always required to be vigilant studying the tea leaves to predict the new rates and changes in their portfolio.

In this way, policy signals can be taken as usable resources which, once understood and interpreted correctly, can help banks control various aspects of their process and permit them to accomplish the goal of balancing the conditions of the economy.