Although the economic tasks and goals of central banks are very similar, each unique economy has its own unique goals. Specifically, when the economy is weak and inflation is weak, the central bank will reduce the borrowing cost by lowering interest rates and releasing the money supply, thus promoting economic growth, and vice versa.
In the final analysis, monetary policy is to ensure the promotion and maintenance of national price stability and economic growth. To achieve this goal, the central bank mainly adopts monetary policy to control the following factors:
Interest rate linked to monetary value
money supply
Bank reserve system
Provide loans to commercial banks (through discount)
Promote open market business.
Types of monetary policy
Monetary policy can be divided into several different types:
Restrictive monetary policy can reduce the money supply, promote the rise of interest rates, and slow down economic growth with high interest rates. This makes borrowing more difficult and expensive, thus reducing the expenditure and investment of consumers and enterprises.
Expansionary monetary policy expands or increases the money supply, or reduces the borrowing cost by lowering interest rates, thus increasing expenditure and investment.
Loose monetary policy aims to promote economic growth by lowering interest rates, while tight monetary policy aims to reduce inflation or curb economic growth by raising interest rates.
A neutral monetary policy will neither create growth nor curb inflation.
Proper inflation is a good thing, and uncontrolled inflation will reduce people's confidence in economy, work and wealth. Therefore, the national central bank usually has an inflation target, for example, setting the target inflation level at 2%. In this way, the central bank can help market participants better understand their reaction to the current economic situation.