- Central banks play a major role in ensuring the stability of the financial system.
- They deploy measures to control inflation and deflation in the economy.
- Central banks have a base target inflation rate set at 2%.
Capital.com, a global investment platform, has released a video about central banks and why banks hike interest rates to beat inflation. The platform also raises an important question: With global nations witnessing a rise in inflation, is hiking interest rates is enough to tackle it?
Interest rates may have to go up, but why? 👇 pic.twitter.com/LNb1c3le39
— Capital.com Worldwide (@capitalcom) September 2, 2022
The trading platform explains that central banks are important in keeping inflation under control. With inflation rising across various economies, central banks usually try to tackle the soaring inflation with interest rate hikes.
Every economy has a central bank that supervises and controls the financial institutions of that country. They basically ensure the stability of the financial system. Central banks not only control inflation but also keep a check on deflation.
While inflation causes a hike in the prices of goods and services, deflation is bad for the economy as it also results in a rise in unemployment. Most central banks set a 2% target inflation rate to ensure that the economy doesn’t slump into deflation.
In situations where inflation goes beyond 2%, the central bank will try to bring it under control. To tackle such a situation, central banks have introduced monetary policies.
Central banks have kept monetary policies in place to help with the growth of the economy and control the flow of money in the economy. To adapt to the different economic circumstances, there are primarily two types of monetary policies.
When the economy is moving at a slow pace, expansionary policies aid in promoting growth. But at times of inflation, central banks try to implement contractionary policies. This is when the central bank hikes interest rates to control the money supply and inflation.