Monetary Tightening
Tue, Apr 15Monetary tightening refers to the approach where a central bank increases interest rates and deposit ratios to restrict the availability of credit. This typically occurs when the central bank aims to temper excessive economic growth.
This strategy is classified as a contractionary monetary policy. Central banks adopt tight monetary policies when the economy is growing too rapidly or when inflation is escalating too quickly.
The central bank enacts tighter monetary policy by raising short-term interest rates, which raises the cost of borrowing and diminishes its appeal.
Tight monetary policy can also be executed by selling assets from the central bank’s balance sheet to the market through open market operations.
Monetary tightening can adversely affect security prices and create challenges in obtaining loans for homes or businesses.
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