Stance of Monetary Policy

Question 1

What is the definition of the Stance of Monetary Policy?

Answer 1

It refers to how the RBA is using monetary policy (both conventional and unconventional) to influence the level of AD.

Question 2

What are the two main types of MP Stances?

Answer 2

Contractionary => Aims to decrease AD, slow down the economy (‘restrictive’ or ‘tightening’)

Expansionary => Aims to increase AD, speed up the economy (‘accommodative or ‘loosening’)

Currently, the RBA’s stance on monetary policy is contractionary, in hopes of reducing inflation.

Question 3

Monetary Policy Neutrality

Answer 3

When the policy interest rate is low enough, it stimulates demand, and when it is high enough, it restrains demand. Somewhere in the middle, there must be a rate that is neither contractionary nor expansionary, therefore neutral.

If the RBA has a neutral (or ‘normal’) MP setting - then the RBA believes that the interest rate at this level will neither encourage nor discourage spending/borrowing.

Question 4

Monetary Policy Stance - Ranges for each type of stance

Answer 4

When the cash rate is:
- Above 3-3.5% = Contractionary
- Below 3-3.5% = Expansionary
- At 3-3.5% = Neutral

Move closer to neutral = ‘less’
Move away from neutral = ‘more’