Monetary policy directly or indirectly affects the distribution of funds and has a profound impact on the economic development of the forex exchange. In the UK, to ensure economic and social stability, as well as create conditions for economic recovery after the epidemic, the Government has implemented many macroeconomic measures, including the Monetary policy. So, Monetary policy? Let’s explore Learn Forex Trading in the article below.
Overview of Monetary Policy
Below, Self-Teach Forex will share with you about Monetary policy and the most popular types of policies today.
What is Monetary policy?
Monetary policy, or Monetary Policy, is a type of macroeconomic policy. Use credit and exchange tools to influence the supply of money to the economy. To achieve monetary stability, and price stability, control inflation, reduce the unemployment rate, and promote economic growth…
Types of Monetary policies
In forex currency, there are two main approaches: expansion and contraction.
Expansionary monetary policy, or monetary easing. This is when the State Bank increases the money supply in the economy larger than usual. To do this, the State Bank often applies one or a combination of two of the following three measures: reducing the discount rate, reducing the required reserve ratio, and increasing purchases on the stock market.
When interest rates decrease, businesses tend to borrow more to develop their business. While users also spend more. Strengthen aggregate demand and create more job opportunities. Therefore, the scale of the economy expanded. Labor income increased, and the unemployment rate decreased. This policy is often applied when the economy is experiencing a recession and unemployment rates are high.
Monetary policy contraction, or tightening, is when the State Bank reduces the money supply in the economy. This is usually done through increasing discount rates, increasing required reserve ratios, and selling securities to the market.
When interest rates rise, individuals and organizations often limit spending and investment. Leading to a decrease in aggregate demand and a general decline in prices. This policy is often used when the economy is growing too fast and inflation is rising.
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The core of Monetary policy
Regardless of whether Monetary policies are expanded or tightened, their core goal is to reduce the unemployment rate. Create job opportunities for people, and control inflation. Promote stability as well as sustainable economic development.
Economic growth on the forex exchange
The main goal of forex monetary policy is to promote economic growth. By adjusting the amount of money in the economy, this policy affects interest rates and aggregate demand. This facilitates increased investment. Increase total output, and raise GDP. All are indicators of ongoing economic development.
Reduce unemployment rate
Monetary policy, through increasing the money supply, can expand the size of the economy. This promotes increased production in enterprises. This creates increased demand for workers, thereby reducing the unemployment rate. However, increasing the money supply often goes hand in hand with accepting a certain level of inflation.
Therefore, the State Bank needs to use monetary tools effectively to control the unemployment rate within the allowable range. At the same time, maintain the stability and growth of the economy.
Stabilize forex prices
Macroeconomic price stability will minimize price fluctuations. Help the State propose and implement economic development goals effectively. When prices are maintained stable, the investment environment becomes more stable and secure. This attracts investors’ attention. Help the economy attract more capital. This provides the basis for economic growth and development.
Inflation is controlled by Monetary policy
Inflation is simply the phenomenon of rising general commodity prices. At the same time, it reduces the value of money. This creates difficulties in exchanging goods both domestically and internationally. The State Bank implements a forex monetary strategy to stabilize commodity prices and the value of currency, thereby controlling inflation.
Monetary policy tool
Monetary policy uses a variety of tools, including required reserve ratios. Exchange rates, credit limits, discount rates . Open market operations and refinancing, aimed at adjusting the money supply for the economy.
Required reserve ratio
The required reserve ratio is the percentage of the amount of money that must be retained compared to the amount of money mobilized according to the regulations of the State Bank, and this amount must be deposited at the State Bank. Therefore, to adjust the money supply in the economy, the State Bank intervenes in this rate. When the State Bank increases the required reserve ratio, the money supply decreases. On the contrary, when the State Bank reduces the required reserve ratio, the money supply increases.
Forex currency exchange rates
Exchange rates represent the relationship between the value of domestic currency and foreign currency. Affects import and export activities, foreign currency transactions, and foreign currency reserves. However, it is not a direct tool of Monetary policy because it does not change the money supply. But exchange rates play an important role in supporting Monetary policy.
The State Bank adjusts the forex exchange rate when it wants to adjust the economy’s money supply in foreign currency:
- To increase the money supply in foreign currency, the State Bank reduces the exchange rate by buying valuable papers from Commercial Banks on the open market, using foreign currency.
- To reduce the money supply in foreign currency, the State Bank increases the exchange rate by selling valuable papers to Commercial Banks, earning foreign currency.
Forex currency discount rate
The discount interest rate is the rate that the State Bank applies for temporary lending to commercial banks to meet irregular cash needs. When the State Bank adjusts the discount rate, the amount of base money changes. And the money supply will also change accordingly.
Commercial banks must reserve a certain amount of cash. To meet customers’ irregular cash withdrawal needs. In case this reserve is not enough, commercial banks will borrow from the State Bank at a discounted interest rate.
When the State Bank increases the discount rate, commercial banks will be more careful in borrowing and increasing reserves. This causes the economy to reduce the money supply. On the contrary, if the State Bank reduces the discount rate, commercial banks will borrow more. Leads to an increase in the money supply in the economy.
Foreign exchange policy uses credit limits
This is the maximum level of outstanding debt that the State Bank stipulates that commercial banks must comply with when providing credit to the economy. When the State Bank adjusts the credit limit to increase, the money supply in the economy also increases. On the contrary, when adjusting the credit limit to decrease, the money supply also decreases.
Open market operations
Open market operations are the process by which the State Bank buys or sells securities on the open market. This action affects the reserves of commercial banks. And affects their credit supply to the market. From there, adjust the money supply in the economy.
When the State Bank buys securities on the open market, commercial banks have more money reserves, leading to an increase in money supply in the economy. On the contrary, the money supply will decrease if the State Bank sells securities.
Refinance the Forex exchange
The State Bank provides credit to commercial banks through the purchase and sale of valuable papers, to provide short-term capital and means of payment for them. This has increased the amount of money supplied to the forex economy.
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What role does Monetary policy play on the forex exchange?
Monetary policy plays an important role in regulating currency circulation in the economy, implemented by the Government and the State Bank to control the monetary system. This policy aims to achieve goals such as controlling inflation and reducing unemployment. Stabilize prices, and protect the purchasing power of money. Promote economic growth. In addition, this is also a tool for the State Bank to monitor the operations of all commercial banks and credit institutions across the country.
For example, in the context of the great impact of the COVID-19 pandemic, the State Bank has implemented a Monetary policy to stabilize the economic situation. A prominent measure is the reduction of interest rates, which helps reduce financial burdens and stimulate business investment activities. Promoting economic development in the difficult context of the pandemic.
Furthermore, in the emergency of the pandemic, according to Decision No. 15/2020/QD-TTG of the Prime Minister, the State Bank has refinanced the Bank for Social Policies. This helps workers borrow money to pay salaries to workers who are temporarily out of work.
Epilogue
Below is the most basic information about the definition, tools, goals, and roles of Monetary policy. Hopefully, this information Learn Forex Trading will help you better understand what Monetary policy is and how the UK State Bank implements the policy in the current context.
Questions about Monetary policy
What is the direction of Monetary policy?
The direction and goals of Monetary policy include reducing the unemployment rate. Control inflation, and protect the purchasing power of money. Promote economic growth and balanced prices.
What is the role of the State Bank in Monetary policy?
The State Bank plays an important role in implementing Monetary policy by adjusting interest rates. Exchange rate management. Manage credit activities to stabilize the forex currency and financial system.
Why is Monetary policy important for the economy?
Monetary policy is important because it directly affects the amount of money circulating in the forex economy. Impact on prices, interest rates, and economic growth. It also helps control inflation and stabilize prices.
