Monetary policy can influence a country’s jurisdiction of the rate of economic growth, employment, inflation, and currency exchange rates. If an economy is facing a downturn, the central bank would attempt to increase production, jobs, and consumer demand by cutting interest rates. This works to reduce the cost of credit and potentially increase the supply of money in circulation. Conversely, if there is runaway inflation, asset price spikes, or excessive lending taking place, policymakers will attempt to introduce demand. This will be done by moderating measures to restore economic and financial stability.
In Hong Kong, monetary and exchange rate policy is conducted by the Hong Kong Monetary Authority (HKMA).
How does Monetary Policy work?
Hong Kong’s monetary policy measures during COVID-19
As COVID-19 impacted the economy of Hong Kong, the HKMA focused its attention on Small and Medium Enterprises (SMEs) and individuals in need.
Furthermore, because consumers were under a lot of stress regarding cash flow, legislative measures were implemented to help companies.
As a result, the HKMA reduced the countercyclical capital buffer as well as regulatory reserves, while simultaneously increasing banking system liquidity. Not only that but employees of hard-hit industries were also given relief loans.
In addition, the HKMA monitors its monetary policy instruments on a regular basis in order to preserve stable economic growth.
How does monetary policy impact investments?
The policies alter the supply of money in circulation and influence interest rates, affecting consumer and business confidence and their spending and investment decisions.
Key pitfalls of monetary policies
The policy’s effectiveness could potentially be compromised due to:
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