Central Bank Actions: How Monetary Policy Affects Investment?

What is Monetary Policy?

Monetary policy is one of the strongest tools that central banks use to manage the economy. Essentially, it involves decisions regarding the money supply and interest rates in the financial system. When the central bank implements these changes, it directly affects the spending capacity of individuals and businesses.

The main tools for implementing monetary policy include: adjusting the discount interest rate, buying and selling securities in the open market, and changing the reserve requirement of commercial banks. By controlling these factors, the central bank can slow down or accelerate economic growth.

Two Different Paths: Expansion or Contraction?

Expanding Currency - When the Country Needs to “Brake”

Expansionary monetary policy is when the central bank wants to “inject” money into the economy. This usually occurs when the economy is weakening or the unemployment rate is high. The central bank will lower interest rates, making borrowing cheaper, thereby encouraging individuals and businesses to borrow and spend.

Imagine this: The interest rate drops from 5% to 1%. At this point, a businessman decides to take a loan to expand his company, while a family decides to buy a new house instead of saving money. As a result, demand increases, companies hire more employees, and the economy begins to grow again.

Real-life example: In 2008, when the financial crisis hit, the Federal Reserve of the United States decided to lower interest rates and implement a government bond buying program to increase the money supply in the economy. This move helped the U.S. economy gradually recover.

Tighten Monetary Policy - When Needed “Pull Back”

Conversely, a tight monetary policy is implemented when inflation is high and the economy is “overheating.” The central bank will raise interest rates, making borrowing more expensive, in order to curb spending and investment.

Imagine when interest rates rise from 1% to 5%, a person will think twice before borrowing money to buy a car or expand a business. When people cut back on spending, demand decreases, prices stabilize, and inflation is kept in check.

Historical Example: In the early 1980s, the Federal Reserve raised interest rates to high levels to combat inflation. While successful in curbing prices, this also led to a temporary increase in unemployment.

How Does Monetary Policy Differ from Fiscal Policy?

Many people confuse these two concepts. Monetary policy is a tool of the central bank, while fiscal policy is a tool of the government through spending and taxation.

Execution Speed: Central banks can change monetary policy within a few weeks, but governments must go through a lengthy legislative process to change fiscal policy.

Scope of impact: Monetary policy aims at macroeconomic goals such as controlling inflation and managing employment indices. Fiscal policy often focuses on specific areas of the economy through targeted spending.

How Monetary Policy Affects the Cryptocurrency Market?

This is the most important part for cryptocurrency investors.

When Currency is Expanded

Monetary expansion means having more money in the economy, lower interest rates, and easier borrowing. When this happens, people's disposable income increases. A portion of this money will seek to find higher yields, including Bitcoin and other cryptocurrencies. Therefore, during a period of monetary expansion, cryptocurrency prices tend to rise.

The reason is simple: when money is easy to earn, people are willing to take higher risks to seek profits.

When Currency is Tightened

Tightening monetary policy has the opposite effect. High interest rates, tight money supply, and reduced spending. People have less money to invest, especially in risky assets like cryptocurrencies. As a result, cryptocurrency prices often decline during this period.

In addition, high interest rates mean that traditional assets such as government bonds become more attractive compared to cryptocurrencies. Investors will opt for “safer” returns.

Summary: Monetary Policy is the Key

Monetary policy refers to the important decisions made by the central bank to manage the economy through the control of interest rates and the money supply. The objectives may include controlling inflation, creating jobs, or promoting growth.

For cryptocurrency investors, it is important to remember that expansionary monetary policy often creates a favorable environment for Bitcoin and other cryptocurrencies, while tightening policy can put negative pressure on prices. By monitoring signals from the central bank, you can better forecast future trends in the cryptocurrency market.