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Global Financial Markets - Essay Example
Monetary stability pertains to low inflation and a stable currency. Stable prices are defined by the government's inflation target. The Central Bank applies various monetary policy options in order to respond appropriately at each stage of the change in the existing macro-economic environment…
Low inflation is a positive scenario as it enables a country to maintain a stable economy and keep the value of local currency money.
For example, if a Central Bank wants to attain and keep exchange rate stability and stem capital outflow, the bank must implement a high interest rate policy such as increasing call market rates to a range of 20 to 30% from a regular level of 10% in most cases. A stable foreign exchange rate will prevent a deep contraction of domestic economic activity. The Central Bank can also encourage an expansion of bank lending to small and medium enterprises by expanding its credit facility to support local enterprises. By achieving its primordial goals of stablility and efficiency in the monetary and financial frameworks, the Central Bank makes its very important contribution to the growth of the local economy.
The Central Bank sets a base rate at which it transacts with other financial institutions. This interest rate then impacts on an array of interest rates set by commercial banks and building societies for their clients consisting of both borrowers and lenders. It also affects the price of financial assets including bonds and shares. The policy of decreasing or raising interest rates influences the level of spending in the economy. For instance, lower interest rates makes saving less attractive and borrowing more attractive. ...