The decisions of central banks can impact everything from your mortgage costs and savings account interest rates to your stock portfolio returns. But how do these banks make their decisions? They’re not your everyday bank, you can’t pop in to stash cash or find a welcoming reception area. Rather, they manage the supply of money in ways that can help control inflation and strengthen economies. Their work can affect you in unexpected and profound ways.
For example, central banks can lower the amount of reserves that financial institutions must hold so that they can lend more to customers. This is known as easing or loosening policy and can fuel economic activity, boost company production and investment, and drive up asset prices. In the past decade, an era of easy money has partly fuelled the global economy’s growth.
In contrast, when inflation is rising, central banks can try to curtail spending by raising the amount of interest that they charge one another for borrowing funds. They can also try to spur activity by lowering rates, which makes credit more plentiful.
As you can imagine, monetary policy decisions are complicated, and not only because of the number of moving parts that affect an economy and its price levels. There are also politics involved, as central banks are often independent of the political group that holds power in a country. In addition, central banks must weigh short-term political goals against long-term aims like fighting inflation and supporting economic stability.