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“Fiscal policy, monetary policy, they need to work together to try and raise the level of growth” – Joe Hockey
Monetary policy refers to the actions undertaken by a country’s central bank to control the money supply, manage interest rates, and achieve macroeconomic goals such as controlling inflation, consumption, growth, and liquidity.
Central banks, such as the Swiss National Bank (SNB) or Bank of England (BoE), use tools like interest rate adjustments, open market operations, and reserve requirements to influence the economy.
However, once you’ve got through all of the theory, terminology and over-complexities, how does monetary policy really impact your day-to-day life? Read below to find out!
Monetary policy has several impacts.
Lowering interest rates can stimulate economic growth by making borrowing cheaper, encouraging spending and investment.
Conversely, raising interest rates can ‘cool’ an ‘overheating’ economy and control inflation by making borrowing more expensive.
As well as the above, monetary policy can affect exchange rates; lower interest rates may weaken a currency, making exports cheaper and imports more expensive.
Monetary policy also influences employment levels. Expansionary policies can reduce unemployment by boosting economic activity, while contractionary policies may increase unemployment if they slow down the economy too much.
The central bank’s decisions can significantly shape overall economic confidence and financial market stability.
Now onto the pros and cons, starting with the pros.
One major advantage of monetary policy is its ability to quickly influence the economy.
Central banks can swiftly implement changes to interest rates or engage in open market operations to address economic issues. This flexibility allows for timely responses to economic shocks or downturns.
Monetary policy can also be a powerful tool for controlling inflation. By adjusting interest rates, central banks can manage demand and keep inflation within target ranges.
Effective monetary policy can cause stable economic growth, contributing to long-term prosperity and financial stability.
However, despite its benefits, monetary policy has limitations.
It may not be effective in addressing supply-side economic issues, such as productivity constraints or structural unemployment.
Furthermore, in periods of very low interest rates, the central bank’s ability to stimulate the economy can be limited, a situation known as a liquidity trap.
Monetary policy can also lead to unintended consequences. For example, keeping interest rates too low for too long can create asset bubbles, which can burst and lead to economic instability.
Moreover, rapid changes in monetary policy can cause uncertainty and volatility in financial markets, potentially harming economic growth.
The key way monetary policy directly affects you is through changes in interest rates.
Lower interest rates mean cheaper loans and mortgages, which can boost spending and investment. However, they also result in lower returns on savings, which can impact retirees and savers. In addition, the opposite is true with higher interest rates!
Inflation control is another critical aspect. Effective monetary policy keeps inflation in check which preserves the purchasing power of your money. Conversely, poor monetary policy can lead to high inflation, eroding savings and increasing living costs.
Monetary policy can also influence job opportunities and wages. Expansionary policies can lead to more job creation and potentially higher wages, while contractionary policies might have the opposite effect, impacting overall economic wellbeing.
Whilst you may be unable to influence central bank decisions, you can influence your own financial decisions.
Knowing where to start is key, and having a Patterson Mills Adviser provides you with this key to a brighter financial future.
Get in touch with us today and book your initial, no-cost and no-obligation meeting.
Send us an e-mail to contactus@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.
Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.
Patterson-Mills Sàrl is powered by Lawsons Network and operates as an Appointed Representative. We benefit from their regulatory infrastructure and cutting-edge software, enabling us to safeguard and enhance your wealth. Lawsons Network AG, Company No. CHE-394.490.386, Rue Neuve-du-Molard 19, 1204 Genève, Switzerland. Lawsons Network AG is registered as an Insurance Intermediary with the Swiss Financial Market Supervisory Authority (FINMA – 37795), a member of the Client Advisors register at Association Romande des Intermédiaires Financiers (ARIF – 32974) and affiliated to Organisme de Surveillance pour Intermédiares Financiers & Trustees (SO-FIT) as an SRO – Affiliate No. 1202.
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