Tight currency generally refers to a contractionary monetary policy, which is a policy tool adopted by the central bank to achieve macroeconomic goals. This kind of monetary policy is the policy of tightening the currency when there is inflation in the economy. This article introduces the means of tightening monetary policy and the impact of tightening monetary policy on foreign exchange.

Tightening monetary policy

What are the means to tighten monetary policy?

Open business: use treasury bonds, policy financial bonds, etc. as transaction types, mainly including repurchase transactions, spot bond transactions, and central bank bill issuance, to adjust the demand for credit funds of financial institutions.

Deposit reserve: By adjusting the deposit reserve ratio, it affects the supply of credit funds of financial institutions, thereby indirectly regulating the money supply.

Bank loans: use re-lending policies and rediscount policies to adjust the demand for credit funds of financial institutions, and affect the supply of credit funds of financial institutions.

Expected annualized interest rate policy: According to the needs of monetary policy implementation, timely use the expected annualized interest rate tool to adjust the expected annualized interest rate level and expected annualized interest rate structure, thereby affecting the supply and demand of social funds, and achieving the established goals of monetary policy .

Exchange rate policy: Affect international trade through exchange rate changes and balance international payments.

Standing borrowing facilities: Improve the effectiveness of currency regulation, effectively prevent liquidity risks in the banking system, and enhance the effectiveness of the regulation of expected annual interest rates in the currency market.

The impact of tightening monetary policy on foreign exchange

Generally, the central bank’s monetary tightening policy is to raise interest rates or increase the reserve ratio. It is a fact in response to the overheating of the market. A certain bubble can promote economic development. Too many bubbles are a kind of speculative enthusiasm in the market. The reason is simple. Indeed, there is too much money, and there is no need for so much money in the market. If there is no tightening at this time, the result will be a fall in the exchange rate. After the tightening policy, the exchange rate is unlikely to fall sharply after the supply and demand relationship in the market is balanced.

If an economy uses loose monetary policy to develop soundly and all indicators are normal, it will not use tightening policies. But there is one exception, the easing policy expires. This is unavoidable. For example, the Fed issued treasury bonds to ease for ten years. After maturity, the balance sheet must be reduced, and the funds on the market must be recovered to repurchase these treasury bonds, so that the U.S. dollar will not lose credit. This is not a monetary tightening implemented by the market without the need for money.

Generally speaking, monetary policy is a control tool used to target the economy. Exchange rate changes are related to the overall situation of the economy and the central bank’s monetary policy, and are the result of a combination of various forces. Rather than simply raising interest rates to increase the exchange rate, and lower interest rates, it is either black or white.

Regarding the issue of tightening monetary policy, this article introduces the means of tightening monetary policy and the impact of tightening monetary policy on foreign exchange. In short, tightening monetary policy is the country’s macro-control of the market, and tightening monetary policy will affect the exchange rate, so foreign exchange investors need to pay attention to relevant policies and adjust investment transactions in a timely manner.