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Monetary Policy Framework

Since November 2008, the Monetary Policy Framework has been based on monetary aggregate targeting rather than the previous exchange rate targeting regime. This transition was to support a liberalised foreign exchange market and floating exchange rate regime as part of an IMF-supported macroeconomic reform programme adopted by the authorities in November 2008.

In this framework, the final target – price stability – is to be achieved by influencing the intermediate target of money supply growth, with reserve money being the operating target for the conduct of monetary policy. As a consequence, financial prices, such as interest rates and exchange rates are free to fluctuate and are 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.

Between 2008 and 2013, quarterly reserve money targets were set and to achieve them, the Bank primarily relied on its market operations to adjust liquidity levels to be at the target. Following a transitional phase in the first quarter of 2014, whereby the Bank opted for stabilising the level of free reserves held by other depository corporations (ODCs), revisions were made to the framework to put more emphasis on consistency and adopt a forward looking approach. The change provides the Bank with greater flexibility in the implementation of monetary policy and contributes to strengthen the transmission mechanism, without the need for changes in the final, intermediate and operating targets.

To make the framework more forward looking, reduce interest rate volatility and provide clearer guidance on short-term interest rates, further revision has been made. This is through the formalisation of the standing facilities that are available to assist ODCs with their short-term liquidity management, namely the offer of overnight Standing Deposit Facility (SDF) and Standing Credit Facility (SCF), the rates of which form the basis of an interest rate corridor.

The floor of the corridor, SDF, sets the rate that the Central Bank will pay ODCs when they place their end-of-day excess funds in an overnight deposit at the Central Bank. As for the SDF, it provides ODCs with overnight, collateralised liquidity with the interest rate charged on this facility forming the ceiling of the corridor.

Whilst a quarterly level of reserve money continues to be concurrently determined, the latest revision to monetary policy implementation places more emphasis on short-term interest rates. The change should improve the transmission of interest rates from the Central Bank to ODCs, thus making short-term interest rates more sensitive to monetary policy signals while contributing more effectively towards achieving the Bank’s primary objective of promoting domestic price stability.

The responsibility for formulating and implementing monetary policy rests with the CBS Board. To ensure the effective segregation of responsibilities and to place due emphasis on monetary policy decisions taken at Board level, the Board decided to replace the Monetary Operations Committee (MOC) by the Monetary Policy Technical Committee (MPTC). Nonetheless, the main responsibility of the committee remains to consider, advise and decide on issues primarily relating to the formulation and implementation of monetary policy within the general guidelines determined by the Bank’s Board.

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