What is Monetary Policy

What is Monetary Policy

Monetary Policy refers to actions and decisions undertaken by the Bank to create appropriate conditions that are in line with the country’s economic objectives. In conducting monetary policy, the Bank closely monitors economic developments to maintain a low and stable rate of inflation, an orderly foreign exchange market, and an adequate level of foreign exchange reserves.

It then utilises a range of monetary policy tools to influence the level of liquidity in the banking system which indirectly influences the level of interest rates and, ultimately, the overall demand for goods and services in the economy.

Monetary Policy Framework

Since the onset of trade and financial liberalisation in the decade of the 1990s, the monetary policy framework of the Central Bank has placed greater emphasis on the use of market-based instruments (open market operations) rather than on direct policy instruments to effect monetary policy.

In mid-2002, the Central Bank implemented a new monetary policy framework based on the use of the Repurchase (‘Repo’) rate. This is the rate that the Central Bank charges commercial banks for borrowing funds on an overnight basis. Changes in the ‘Repo’ rate are used to signal to the banking system the direction in which the Central Bank wishes short-term interest rates, and ultimately, the whole structure of interest rates, to move. Movements in interest rates affect credit expansion which in turn affects inflation, employment, and economic growth.

Monetary Policy Objectives

The primary objectives of the Bank’s monetary policy framework are the maintenance of:

  • a low and stable rate of inflation
  • an orderly foreign exchange market
  • an adequate level of foreign exchange reserves

Factors Influencing Monetary Policy and Its Implications

The conduct of monetary policy is influenced by the pace of real economic activity, the fiscal operations of the Government, trade, and capital flows as well as the operations of financial institutions. In carrying out its monetary policy, the Bank also takes into account the potential implications for the foreign exchange market and the stability of the exchange rate.

Instruments of Monetary Policy

The Central Bank employs a range of both direct and indirect instruments to effect monetary policy. The indirect or market-based instruments largely comprise open market operations and the use of a policy interest rate – the ‘Repo’ rate, while the direct instruments mainly involve use of the statutory reserve requirement. The Bank may also establish special facilities in order to add liquidity or to absorb excess liquidity from the financial system.

Indirect Instruments

The indirect or market-based instruments largely comprise open market operations and the use of a policy interest rate – (the ‘Repo’ rate.)

Direct Instruments

The direct instruments mainly involve use of the statutory reserve requirements.

Monetary Policy Committee

The Monetary Policy Committee (MPC) is responsible for the development and implementation of the Bank’s monetary policy framework. This Committee sets the ‘Repo’ rate, issues the Monetary Policy Announcement, and oversees the preparation and publication of the semi-annual Monetary Policy Report.

The MPC is assisted by a Monetary Policy Secretariat (MPS) which undertakes on-going analysis of the latest economic and financial information. The MPS is chaired by the Manager of Research and comprises staff from the Research, Information Services-Statistics Division and Reserves and Domestic Market Management Departments.

Members of the Monetary Policy Committee

Dr. Alvin Hilaire

Governor and Chairman of the Board of Directors

Dr. Dorian Noel

Deputy Governor and Member of the Board of Directors

Mr. Terrence Clarke

Senior Manager, Capital Markets Development

Mr. Alister Noel

Senior Manager, Macroeconomics and Payments

Ms. Wendy D’Arbasie

Senior Manager, Monetary Operations

Monetary Policy Communications (Reports & Announcements)

Monetary policy decisions of the Central Bank are usually communicated to the public via the ‘Monetary Policy Announcement’, periodically by way of special media releases and through the Monetary Policy Report which is published semi-annually.

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