Monetary Tightening

Monetary tightening is the policy in which a central bank raises interest rates and reserve requirements to make credit less accessible. This approach aims to reduce the money supply and stabilize the economy by discouraging excessive borrowing and spending.

It is a key component of contractionary monetary policy.

The central bank often tightens monetary policy by raising short-term interest rates (which makes borrowing more expensive for consumers and businesses, leading to reduced spending and investment) and by using open market operations to sell assets.

While monetary tightening is essential for controlling inflation and stabilizing the economy, it must be carefully calibrated to avoid unintended negative consequences, for example adversely affect security prices and make it difficult to secure loans for purchasing a home or financing a business.