5.3.3—Monetary policy stance

An expansionary monetary stance lowers the effective cost of finance or increases liquidity to support demand; a contractionary stance raises financial restraint to reduce inflationary pressure. A neutral stance is consistent with the central bank’s estimate of stable conditions.

The stance is relative to the economy’s needs and neutral rate, not just the level of the policy rate. A low rate may still be contractionary if inflation and the neutral rate are even higher.

A rate rise from 2% to 3% may be contractionary during weak demand, but expansionary in a high-inflation economy if it remains below the rate needed to slow spending.

“High” and “low” are not enough to classify policy; compare the instrument with inflation, expectations, output and the neutral benchmark.