As you have probably already guessed fundamental analysis consists of so much more than a simple interest rate policy. There are so much more other things. And one of them is monetary policy of the country host of the currency in question.
Monetary policies are finance-regulating policies that are imposed by government and their financial banks. These policies are imposed in order to reach certain monetary goals and economic mandates. And the most difficulty is hidden in the fact that not all of the countries are in the same tracj and by the fact that while some of the policies and regulation are universal, there are some policies that vary from country to country.
The get to the said goal central banks can regulate such thigs as
- the interest rates;
- inflation level;
- money supply,
- bank reserve requirements;
- lending to commercial banks.
There are several types of monetary policies:
Contractionary or restrictive monetary policy reduces the size of the money supply of the economy. It can also occur with the level of interest rates rising. The idea behind a policy like that is to slow down economic growth with the high interest rates.
Expansionary monetary policy, on the other hand, expands or increases the money supply, or decreases the interest rate and with that the economy goes on growing as it is easier to borrow money from the banks due to the low interest rates.
Accommodative monetary policy creates economic growth by lowering the interest rate, while tight policy reduces inflation or restrain economic growth by raising interest rates.
Finally, neutral monetary policy dies neither of the abovementioned things and doesn’t aim at anything.
For us traders, changes in the monetary policies are not always met with open arms as they are always tied to changes in interest rates. That means that the support for the currency changes and the currency can perform differently from what we are used to. But we have already gone through the connection between trading and interest rates.
It is also important to note usually changes in monetary policies are not done sharply and drastically. Usually they are pretty restrained and very limited with that exact reasoning – changes in monetary policies are too influential.