What is an Accommodative Monetary Policy?

As a way of helping to stimulate the economy, the use of an accommodative monetary policy is often one means of helping to improve the financial situation within a given geographic region or throughout a country. Here is some information about the nature of an accommodative monetary policy, plus a couple of examples of when such a policy can be beneficial to the economic health of a region or country.

An accommodative monetary policy is a procedure or policy that is set forth by a central bank within a given country. Essentially, the purpose of the policy is to stimulate growth within a sluggish economy that is posting little or no growth at all. This usually involves making a temporary change in the short term interest rates on all sorts of loans, from personal to business loans. The accommodative monetary policy is invoked in the hope that the lower interest rates will attract the attention of the general public as well as business leaders and create more desire to borrow money from lending institutions to make larger purchases.

The motivation is that large purchases, such as homes, business equipment, cars and other high priced items, will help to stimulate the economy and get things back into a range where the rate of economic growth can be considered healthy. This is in direct opposition to a tight monetary policy, where borrowing would be discouraged by a short term increase in lending rates.

Use of this form of loose credit can be very helpful to the individual consumer. With a lower interest rate, it may be possible to borrow money to make a down payment on a home or purchase a vehicle, especially since the lower rate will positively impact the amount of the monthly payment put in place to repay the loan. This can be especially helpful to someone who is able to pay off the item purchased with a loan before the interest rates go back up. Within this scenario, it is possible to save quite a bit of money while still securing the goods desired.

Businesses, both large and small, can benefit from the temporarily lower interest rate created by an accommodative monetary policy. Purchasing needed equipment for replacements and upgrades during one of these cycles will make a huge difference to the bottom line. The upgrades can place the company in a position to not only keep providing quality goods and services to their customers, but also be poised to expand the operation.

As a necessary Central Bank policy, the periodic implementation of an accommodative monetary policy has proven to be helpful in lifting an economy out of a slump and restoring vitality when it is most needed. Consumers of all kinds can benefit from the activation of an accommodative monetary policy, especially when it is possible to borrow funds and repay them before there is an upward change in the interest rates.