National governments use monetary policy tools to influence the economy, but there are disadvantages. Lowering interest rates can negatively impact savers, while raising rates can decrease consumer spending. Monetary policy can also indirectly affect investments and disrupt the free market.
Many national governments use a variety of different monetary policy tools to directly influence the economy. These policies are usually set up to achieve some goal such as making loans cheaper or reducing inflationary pressures. The disadvantages of monetary policy include the fact that certain policies have a negative impact on certain individuals and businesses. Also, some people argue that monetary policies have a negative impact on the stock market.
When interest rates are high, borrowing costs rise, which means mortgages and auto loans are expensive and credit cards have high interest rates. Central banks can lower rates by reducing the interest rates banks have to pay to borrow money from the government. Disadvantages of monetary policy decisions aimed at lowering interest rates include the fact that banks lower interest rates on deposit accounts such as certificates of deposit (CDs) in response to such policy moves. Banks have no incentive to pay high rates to consumers when funds can be borrowed cheaply from the government. Therefore, savers earn less with their money and this can affect their standard of living.
During inflationary times, national governments raise key interest rates to make credit more expensive. As a result, consumption and consumer spending often decrease. High rates mean better returns for savers, but mortgages and auto loans can become prohibitively expensive for other consumers. Thus, the disadvantages of monetary policy include that government agencies have to make decisions that benefit savers and negatively impact borrowers or vice versa.
Some types of investments, including bonds, are sensitive to interest rate fluctuations. When interest rates rise, low-yield bonds decrease in value, but the opposite is true when interest rates rise. Consequently, one of the drawbacks of monetary policy is that the national government can indirectly influence the sales of fixed-income securities. In some cases, governments use monetary policy to deliberately manipulate the bond market for the greater good of the economy, but this can cause bondholders to lose money.
The value of inventories often declines during times of recession and other times of economic uncertainty. Some investors take advantage of such situations and buy shares at low prices with the expectation of selling those shares for a profit when the market recovers. Critics of monetary policy argue that government actions disrupt the natural ebb and flow of the free market. If a government takes steps to stabilize the market, inventories may not rise and fall based on market conditions. Some people argue that fears about government actions affecting the market may convince some against investing in nations where government agencies tightly control monetary policy.
Protect your devices with Threat Protection by NordVPN
