Contractionary monetary policy is the process whereby a central bank deploys various tools to lower inflation and the general level of economic activity. Central banks do so through a combination of interest rate hikes, raising the reserve requirements for commercial banks and by reducing the supply of money through large-scale government bond sales, also known as, quantitative tightening (QT).
It may seem counter-intuitive to want to lower the level of economic activity but an economy operating above a sustainable rate produces unwanted effects like inflation – the general rise in the price of typical goods and services purchased by households.
