Monetary policy – is it the end of the tightening cycle?

Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.

Further goals of a monetary policy are usually to contribute to economic growth and stability, to lower unemployment, and to maintain predictable exchange rates with other currencies. Monetary policy is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in order to avoid the resulting distortions and deterioration of asset values. See a mindmap of Monetary Policy below.

Have interest rates gone far enough? A graphic from the FT below shows that cuts in interest rates are set to outnumber increases among the world’s 30 largest central banks. It could be that the global monetary tightening cycle has ended and economies were now approaching a point where lower growth and inflation is evident. With this is mind interest rates have done the job but cutting them straight away is always risky if inflation creeps back up again. Monetary authorities have got to be sure to avoid embarrassment so there maybe a ‘steady as she goes’ attitude and no change in rates.

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