The government will employ what are known as government monetary policy instruments/tools when it wishes to attain and maintain target interest rates, slow down the growth rate of the amount of money in circulation to mention just a few. The tools encourage financial institutions to deposit money back with the government.
What are government monetary policies?
The monetary policies of a country are those policies that control how that country manages its currency, for example by controlling interest rates or exchange rates. In order to prevent inflation or deflation, which usually impacts business growth, employment, and net exports, monetary policies manage how money is supplied, how costs are regulated, and the value of the country's currency.
The goal of monetary policies is to affect how the economy performs as measured by variables like the interest rate, inflation, employment, and economic output. It influences the economy's demand, including how ready consumers and businesses are to spend money on products and services.
The strategic financial goals of a company or an individual should be in sync with the monetary policies of the government.
Government monetary policies tools
The three main tools of government monetary policies used to regulate the cost, supply of money and its value include:
Open market operations (OMO) - here, the central bank buys short-term government securities like Treasury bonds and Treasury bills, thereby increasing money supply, lowering interest rates, and making loans considerably more accessible.
Reserve requirements - this refers to the minimum amount of liquid assets that a deposit money institutions are required to retain, and it is a powerful instrument for shielding banks from unusual market upsets. Additionally, this could influence the volume of lending, the quantity of deposits and credits, and the amount of money in circulation in the economy.
Discount rate or discount window operations is the interest rate applicable to short-term loans provided by Central or Federal Reserve Banks to deposit money institutions. Here, Central or Federal Reserve Banks maintain the liquidity and stability of the financial system while serving as lenders of last resort to deposit money institutions. The discount window operations facilitate a smooth flow of credit to households and businesses, as well as assist deposit money institutions in managing their liquidity concerns.
Monetary policy committee
The Monetary Policy Committee members of a country are those who decide what monetary policy action to take in an economy and are required to meet at least four times in a year. However, the number varies according to country. In England, they meet eight times. In Nigeria, they meet quarterly except in the event of an emergency. In India, at least four times a year. In Thailand, in 2022 they cut it from eight to six times a year. In South Africa, six times a year. And, in Ghana, six times a year, except in the event of an emergency.
In summary, it is impossible to overstate the importance of government monetary policies in an economy since they impact the economic activities of both individuals and businesses influence on their business operations. Therefore, a business should examine how the government's monetary policies impact its strategic financial goals and should be periodically evaluated.
Our financial advisory specialist team can work with you and your business to prepare your 2023 budget to give your business a strong head-start into the year.
Email us at: enquiries@ovacgroup.com for a free consultation with our team specialists.
Comments