MONETORY POLICY : ECONOMICS
NEWS : The
global economy is navigating uncertainty as financial markets react to interest
rate changes and employment data.
WHAT’S IN THE NEWS ?
The
Bank of Japan’s rate hike disrupted Asian markets, highlighting challenges in
implementing monetary policy amid volatile global markets and the
interconnectedness of domestic policies and international financial activities.
Global
Economic Uncertainty
- Despite financial market recovery,
global economic uncertainty remains high.
- U.S. Employment Concerns:
Weak job creation in the U.S. threatens post-pandemic recovery.
- Bank of Japan Rate Hike:
The Bank of Japan's interest rate increase unsettles financial markets,
leading to equity flow reversals and a decline in Asian markets.
- Central Bank Challenges:
Highlighting the difficulty central banks face in balancing inflation
control with economic activity.
Recession
Fears and Monetary Policy
- Monetary Policy Trade-Off:
Central banks typically combat inflation by raising interest rates, which
reduces investment, aggregate demand, and labor demand.
- Criticism of Approach:
Critics argue this approach unfairly impacts workers amid a cost-of-living
crisis; alternative suggestions include reducing company profit margins
and breaking monopolies.
- U.S. Jobs Report:
Weaker-than-expected jobs data in the U.S. sparks recession fears, leading
to a sell-off in equity markets and heightened concerns about major tech
companies.
Market
Reactions and Financial Sector Impact
- Sahm Rule Activation:
Rising unemployment rates trigger the Sahm rule, leading to automatic
disbursement of unemployment checks, which correlates with potential
recession indicators.
- Monetary Policy Challenges:
The swift reactions in financial markets pose significant challenges for
monetary policy, often outpacing policy responses.
The Carry
Trade and Global Finance
- Impact of Japan's Rate Hike:
The Bank of Japan's interest rate increase disrupts the "carry
trade," causing higher borrowing costs and selling pressures in other
markets.
- Global Ripple Effects:
Domestic policy decisions, like Japan's low-interest rates, have
far-reaching impacts on global financial activities and other economies.
Challenges
for Monetary Policy
- Recovery vs. Vulnerabilities:
Although financial markets show recovery, vulnerabilities and recession
fears persist.
- Global Finance Instability:
Events underscore the destabilizing potential of global finance,
complicating effective monetary policy.
- Cross-Border Financial Asset
Movements: The rapid movement of financial
assets across borders adds complexity to national economic policies,
aligning with Keynes’s view on the instability of finance-driven capital
development.
What Is Monetary Policy?
- Monetary
policy refers to the actions undertaken by a country’s central bank or
monetary authority to control the money supply, manage interest rates, and
achieve macroeconomic objectives such as controlling inflation,
consumption, growth, and liquidity.
- By
adjusting the policy interest rates and other instruments, central banks
influence economic activity, impacting borrowing, spending, and investment
decisions.
- In
expansionary monetary policy, interest rates are lowered to stimulate
economic growth, while contractionary policy involves raising interest
rates to curb inflation.
Through
these measures, monetary policy aims to stabilise the economy, maintain price
stability, and foster conditions conducive to sustainable economic growth and
employment.
Source
:
https://epaper.thehindu.com/ccidist-ws/th/th_delhi/issues/94368/OPS/GA6D62CB6.1+GTPD63R4V.1.html