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AS Macro Key Term: Monetary Policy Tightening
11th April 2011
A tightening of monetary policy is a decision by a central bank to use monetary policy to squeeze the growth of demand in the economy in an attempt to control / reduce inflationary pressures. It is the opposite of an expansionary monetary polocy. In recent weeks we have seen both the European Central Bank and the People’s Bank of China increasing their benchmark lending rates by 0.25 percentage points – this is an example of monetary tightening.
Tightening of policy occurs when
(i) Policy interest rates are increased (ii) The central bnak decides to reverse some of the quantitative easing applied to the banking system (iii) Tighter controls are applied on the level of bank lending / credit creation (iv) The central bank seeks to achieve an appreciation of the exchange rate
Short term interest rates in the Euro Area
Data from Timetric.
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3 month money market interest rate, EU from Timetric
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.