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Tight Monetary Policy


What it is

A tight monetary policy is an approach taken by a central bank (in the Philippines, it is the Bangko Sentral ng Pilipinas or BSP) to manage inflation, or to deal with economic growth that is seen as rising too fast. It is also called a contractionary policy.


There are two ways by which a tight monetary policy is generally done. The first is through raising interest rates, which makes borrowing more expensive. This makes companies think twice before taking out loans to expand, which in turn can slow down the circulation of money through the system.


The second method is through open market operations (OMO). This covers several different options, including reverse repurchase transactions, and the buying and selling of government securities.


What it means for you

When a tight monetary policy is implemented, the flow of money through the financial system slows down. While this might not impact you directly, you could still notice the effects when you pay for certain goods and services.


The opposite is called a loose monetary policy, which expands the money supply to encourage growth.


Monetary policies are chosen according to many factors, including the inflation rate. They rarely cause an immediate change, and are usually fully felt many months after a policy is taken.

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