There is always a temptation to look at only one element in deciding on the monetary policy decisions. For example, the rates should be kept low to boost industries and from this perspective a central bank would have never raised rates. However there are multiple objectives that a central bank strives to accomplish using its monetary policy and hence there are multiple macro drivers that a global central bank looks at. The following are some of the key ones:
a. Inflation
Inflation is the primary concern of a central bank. It would always strive to keep inflation low so that the cost of goods and services does not exceed the normal growth rate of income. A higher inflation is disastrous to the economy and its participants. However a deflation, reduction in prices over time is also detrimental to the economy as it affects the consumption cycle as well as industry demands. People tend to consume less in deflationary environment and hence businesses tend to get affected. Hence a central bank tends to ensure that the inflation remains low but positive by hiking rates whenever there is a fear of higher inflation.
b. Unemployment
Unemployment is a major global worry these days as unemployment leads to lower demand, social unrest as well as poor outlook. Hence a central bank tends to ensure that the policy is such that it reduces unemployment which is either by driving demand and GDP or by reducing interest rates to ensure that corporations hire more and expand businesses. This is contrary to the policy of reducing inflation. Hence a central bank would need to maintain this balance.
c. Growth
A central bank though doesn’t generally have growth on its mandate, it generally strives for it. Generally, it would strive to achieve higher growth as it helps reduce unemployment and also ensures a general positive outlook for various participants. Also, it ensures that businesses do well and hence there is smooth production and performance of the economy. A central bank generally reduces interest rates to promote growth.
d. Bubble formations
This has been a recent addition to the drivers that a central bank looks at. Considering the 2008 crisis, this driver is being looked at very closely to ensure that there are no major bubbles formed as a burst of this bubble would lead to serious repercussions for the economy. A bubble burst would cause economies to lose several years of growth. A central bank monitors this closely and ensures that there is prudent risk taking thus avoiding bubbles. Higher risk taking due to lower interest rates is generally curbed by the central banks by ensuring that they keep interest rate expectations under control.
