What is moral suasion?
Moral suasion refers to the use of persuasive language without physical force or compulsion to influence or alter someone's behavior. It's commonly used by central banks in economics.
How does moral suasion work?
Central banks use moral suasion to encourage commercial banks to make decisions that align with general monetary policy and the economy's best interest. This could involve limiting lending to non-priority sectors.
It's often used alongside other credit control methods, especially when they're ineffective. The central bank might use it more when there are many commercial banks to achieve its goals.
Using moral suasion, the central bank appeals to the banks' patriotism, and it's not related to any law or formal credit control method. It's based on the relationship between the central and commercial banks.
Moral suasion is a softer method as it doesn't involve threats or penalties and aids the central bank in gaining voluntary cooperation from commercial banks. Its effectiveness is contingent upon the commercial banks' compliance with the central bank's directives.