{"id":375024,"date":"2024-03-28T18:39:59","date_gmt":"2024-03-28T13:09:59","guid":{"rendered":"https:\/\/zerodha.com\/z-connect\/?p=375024"},"modified":"2024-03-28T18:39:59","modified_gmt":"2024-03-28T13:09:59","slug":"its-the-economy-stupid-central-banks-take-their-bets","status":"publish","type":"post","link":"https:\/\/zerodha.com\/z-connect\/subtext\/its-the-economy-stupid-central-banks-take-their-bets","title":{"rendered":"It\u2019s the economy, stupid! Central banks take their bets"},"content":{"rendered":"

We love India Data Hub\u2019s weekly newsletter, \u2018This Week in Data<\/a>\u2019, which neatly wraps up all major macroeconomic data stories for the week. We love it so much, in fact, that we\u2019ve taken it upon ourselves to create a simple, digestible version of their newsletter for those of you that don\u2019t like econ-speak. Think of us as a cover band, reproducing their ideas in our own style. Attribute all insights, here, to India Data Hub. All mistakes, of course, are our own.<\/em><\/p>\n

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Last week, there was a blitz of central bank meetings from across the world. As many as ten central banks were in action through the week.<\/p>\n

Look, I don\u2019t care how you try to sell this. I refuse to get excited about meetings. On principle.<\/strong><\/p>\n

That\u2019s… Well, that\u2019s fair, I suppose. But there\u2019s a deeper story here that might interest you.<\/p>\n

While central bank meetings might seem sedate and boring from afar, think of what they\u2019re really trying to do. Their job, simply, is to keep prices within a reasonable range. That\u2019s been an exceptionally hard job in the last few years.<\/p>\n

The global economy was never predictable, but at least it was stable<\/em> before the COVID-19 pandemic. Most people ran on autopilot – with an established sense of how they did things and who they traded with. As the virus made its way across the world, however, everything briefly blinked out of existence. It never came back the same way. Its return was unruly and chaotic, with economies and firms abruptly exiting and re-entering global trade. The old ways of doing things had broken down. Everything grew expensive.<\/p>\n

We\u2019re still guiding things back to normalcy. This process hasn\u2019t been easy: interrupted, as it has been, by open tensions and war between major economies, and by major trade routes getting choked. Prices are far from steady.<\/p>\n

Central banks are reading the tea leaves in a situation where things can still turn on a dime, and then call the right policy for what may happen weeks from now. And that\u2019s why we\u2019re interested in them.<\/p>\n

Sure. But what do central banks have to do with disease and war?<\/strong><\/p>\n

Directly? Nothing. But they have everything to do with prices. We spoke about this a few weeks ago<\/a>, in fact:<\/p>\n

“\u2026money has value, and that value depends on what it can buy. Money loses value when there\u2019s too much of it. If you add a lot of it to an economy without creating new things it can buy, soon, you need more money to buy each thing. It\u2019s just simple demand and supply. This is why prices go up.<\/span><\/em><\/p>\n

Fresh money enters an economy through bank loans. At least in theory, banks get this money on loan from the RBI, paying interest at a \u2018policy repo rate\u2019. Think of this as the price banks pay for any fresh money they loan. If the price is low, banks can give out a lot of cheap loans, and lots of money can enter the economy. If it is high, banks must charge much higher interest, and fewer people take loans. Less money gets into the economy.<\/span><\/em><\/p>\n

There\u2019s the rub. Loans, when used well, make an economy grow. At the same time, if too much money comes into an economy, prices go up. For an economy to run well, you must balance the two. And that is the job of the RBI: it must set the policy repo rate at a point that makes loans abundant enough for the economy to keep growing while keeping them expensive enough that money doesn\u2019t flood the economy.”<\/span><\/em><\/p>\n

Central banks across the world work in roughly the same way, setting the price of loans to give money a stable value. When goods become harder to buy, they make money harder to receive as well, so that some balance is maintained between the two.<\/p>\n

Fiiiine. Tell me about these meetings.<\/strong><\/p>\n

Here\u2019s a quick summary:<\/p>\n

\"\"<\/a><\/p>\n

There were a few broad trends on display:<\/p>\n