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Monetary Policy Framework

Since November 2008, the Monetary Policy Framework is based on monetary aggregate targeting rather than the traditional exchange rate targeting. This transition was to support a liberalised foreign exchange market and floating exchange rate regime as part of IMF-supported economic reform program adopted by the authorities in November 2008. In this framework, the final target - price stability - is to be achieved by influencing changes in the total amount of liquidity in the economy, with reserve money being the intermediate operating target of monetary policy. As a consequence of this new monetary targeting system, financial prices, such as interest rates and exchange rates are free to fluctuate and be determined by market forces. In that respect the Bank had to eliminate all its administrative controls and focus on monitoring developments in the monetary and financial markets so as to intervene when necessary to avoid disruptive fluctuations.

Under the reform program, quarterly monetary targets are set and to achieve them the Bank primarily relies on its market operations. Interventions for managing bank's liquidity are guided by a Liquidity Monitoring Framework maintained by the Bank. This framework identifies the factors which influence bank's liquidity and is used to make forecasts on future liquidity flows. A long-term objective for monetary policy implementation is to strengthen the influence of interest rates on economic developments. As interbank and money markets develop, the Bank will place more emphasis on steering short-term interest rates.

The responsibility for formulating and implementing monetary policy rests with the CBS Board. The Monetary Operations Committee (MOC) has the responsibility to oversee the operational implementation of monetary policy within the general guidelines determined by the CBS Board and directions given by the Governor.