Monetary Tightening

Monetary Tightening

The policy in which a central bank raises interest rates and deposit ratios to make credit less easily available. This usually happens when the central bank is seeking to control or is concerned about inflation. Monetary tightening can negatively impact security prices and make it hard to receive a loan for a house or business.
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Looking at the monetary tightening that began in February 1994 and June 2004, the dollar strengthened substantially in both cases before the first rate hike, but then weakened by around 8 percent (as gauged by the Fed's dollar index) in the subsequent six months.
For some time now the markets have been of the thinking that the impending monetary tightening cycles from the Federal Reserve and BOE will move neatly one after the other, with the Fed hiking in either September or December this year and then the BOE soon after that.
All the worst bear markets in living memory - 1973-74, 1980-82, 2000-02 and 2007-09 - occurred after a series of rate hikes by the Federal Reserve, and monetary tightening is the most widely discussed investment risk today.
In effect, the fall in iron ore prices and a rise in the Aussie dollar that is a de facto monetary tightening at a time when the growth ballast for the economic (mining capex falls, the $200 billion seven LNG megaprojects like Gorgon/Wheatstone, Curtis are on steam, consumer spending decline) boom are dubious.
Global Banking News-June 25, 2014--Indonesia to continue monetary tightening
28 indicate that this reality was clearly brought up: "In order to contain the deterioration in inflation expectations and pricing behavior, the committee implemented strong and frontloaded monetary tightening.
Summary: Pressure on embattled Turkish lira relents in response to aggressive monetary tightening last month.
Turkey s central bank kept its policy rates but said additional monetary tightening was necessary to make sure that inflation stays in line with the bank s 5% target and the bank would increase its target for interbank money market rates to 9.
0 percent CPI inflation could be good news for the markets as monetary tightening is not justified," they said.
To some extent that obviates the need for further monetary tightening.
The trend in monetary tightening will help contain inflation and will also aid in the State Bank of Pakistan's drive to rebuild foreign exchange reserves.
The committee will maintain the cautious monetary policy stance and implement additional monetary tightening at the appropriate frequency until the medium-term inflation outlook is in line with the medium-term targets," the central bank said in a statement on its website.