Monetary policy is used as a key macroeconomic policy tool in the management of overall macroeconomic conditions.
The Central Bank or the monetary authority of any country is generally mandated with the responsibility of conducting the national monetary policy, which essentially represents the delicate act of finding some balance between the demand for and supply of money, often achieved by altering the price of money, the interest rate. The delicate balancing act involves the avoidance of not only excess supply of money as a source of risk to inflation, but also tight liquidity conditions as a constraint to economic growth.
Over time, while money supply has increasingly become largely demand determined, financial innovations have also added uncertainty to the conventional relationships between money, output and prices. As a result, changes in interest rates have increasingly reflected the stance of monetary policy pursued by central banks.
While a tight monetary policy (reflected in increase in policy interest rates) aims at containing inflation and economic overheating, an easy monetary policy (reflected in lowering of interest rates) aims at countering an economic slowdown. The interest rate stance, thus, broadly reflects the monetary policy response of a central bank to economic developments at any point of time. The objectives of monetary policy, and the parameters guiding the actual conduct of policies, however, could vary from country to country depending on country specific conditions and policy preferences. In Oman, the monetary policy of the CBO is conditioned by the fixed peg of the RO to the US Dollar.