Reducing the rediscount rate is more of a policy signal, that is, the monetary authorities hint to the market that they will adopt a proactive monetary or fiscal policy. The impact of changing the deposit reserve ratio is much greater.
Interest rate adjustment is mainly to achieve some macroeconomic goals through interest rate level and differential interest rate. The adjustment methods of currency circulation include statutory deposit reserve ratio, rediscount interest rate and open market business.
In the period of economic recession, we should implement expansionary monetary policy, increase money supply and lower interest rates to stimulate aggregate demand. During the period of economic prosperity, we should implement a tight monetary policy, reduce the money supply and raise interest rates to curb aggregate demand.
Extended data:
As the reference standard of capital cost of commercial banks, the rediscount rate of the central bank is the lowest loan interest rate in the interest rate system. The rediscount rate stipulated by the central bank affects the financing direction of commercial banks and actually becomes one of the standards to measure the capital cost of commercial banks.
When a country suffers from inflation or needs to tighten the money supply for other reasons, the central bank will correspondingly increase the cost of providing funds for commercial banks by raising the rediscount rate, that is, reduce its reserve for determining the credit scale, so that commercial banks can shrink the credit scale to achieve the purpose of tightening the money supply.
If a country needs to expand the money supply due to economic recession or other reasons, the central bank will reduce the rediscount rate to encourage commercial banks to increase their loans to the central bank, thus expanding the loan scale and increasing the money supply.
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