The main thrust of monetary policy is to be either expansive or restrictive. An expansionary monetary policy will stimulate growth while a restrictive policy aims to stamp out inflation.
Expansionary – Usually achieved by lowering interest rates which should increase borrowing, investment and consumption through lower costs of borrowing.
Increasing the monetary supply (as in QE) has a similar effect as does lowing the amounts banks are required to retain as reserves.
Restrictive – When interest rates are raised this increases the cost of borrowing and will lead to reduced investment and consumption. This is typically introduced when fears that the money supply has become too big and that inflation will be triggered as a result.
As both monetary policy and the resultant interest rate decisions have a major impact on the forex market it is important for the forex trader to keep an eye on major policy decisions around the globe.
Rate Decisions are set by the committees of the major central banks which meet on a regular basis at set times. After which an announcement is made as to what decisions were taken with regard to interest rates, whether to raise, lower of keep them on hold. These decisions are much anticipated and debated upon. Down to how many committee members voted for what, etc.
Policy statements usually accompany these announcements and may also include statements regarding the money supply and the future direction of monetary policy.
In addition central bankers and their political counterparts make public speeches and pronouncements that are pored over for any hint of the future direction of monetary policy and interest rates.
Forex Traders and currency brokers need to be constantly aware of the current market thinking on the direction of monetary policy and interest rates and should therefore follow all major announcements via the news and media as well as the myriad of online sources of information.
