What is a monetary response to control capital inflows if inflation is not an immediate threat?

Raising interest rates is a common monetary response to control capital inflows, especially when inflation is not an immediate threat. By increasing interest rates, a central bank can make investments in the country's assets more attractive to domestic and foreign investors, leading to an appreciation of the currency and potentially reducing excessive capital inflows that can create asset bubbles.

In scenarios where inflation is not pressing, a central bank has more flexibility to manage capital flows through interest rate adjustments rather than focusing solely on controlling inflation. Higher rates can also help stabilize the financial system by discouraging speculative investment and promoting a more sustainable economic environment.

This approach is particularly effective because it not only influences the flow of capital but also helps maintain confidence in the currency and financial markets, creating a buffer against any future inflationary pressures that may arise from excessive capital influx.