C17. Bank Negara Malaysia Monetary Policy Framework and Foreign Exchange Policy Flashcards
what are the 3 pillars of central banking?
monetary stability, financial stability and efficient
payment system
what is monetary policy?
Monetary policy is the process by which the monetary authority or central bank controls the supply of money, often targeting an inflation rate or interest rate to attain a set of objectives oriented towards the growth and stability of the economy giving due regard to the developments in the economy.
how does the money supply changes affect aggregate demand and economic activity?
The changes in the supply of money will affect the credit flow into the economy by influencing financial conditions. The flow of credit will in turn determine aggregate demand and economic activity.
what is fiscal policy?
relates to gov spending and taxation.
what are the 2 actions that can be applied to monetary policy?
- expansionary policy
- increases the money supply more rapidly than
usual
- used to try to combat unemployment in a recession by lowering interest rates to entice businesses into expanding. - contractionary policy
- expands the money supply more slowly than usual or even shrinks it.
- intended to slow inflation in order to avoid the resulting distortions and deterioration of asset values.
what are the 3 terms that can be used to describe monetary policies?
a) Accommodative:
- Central banks set an appropriate interest rate level to stimulate and create economic growth
b) Neutral: Central banks set an interest rate level intended neither to create growth nor control inflation
c) Tight: Central banks raise interest rate and tighten liquidity with intention to contain inflation
what are the monetary policy tools to change the monetary policies?
a) increasing interest rates via changes in policy rate
b) reducing the monetary base
c) increasing reserve requirements.
The rationale for using overnight interbank rate as the new interest rate framework
a) represents a change in the system of implementing monetary policy & promotes more efficient pricing by banking institutions.
b) The favourable economic & financial environment & the more developed financial infrastructure accord the best potential for the smooth and efficient transition to the new interest rate framework. This is reinforced by greater transparency, enhanced customer financial literacy and avenues for customer redress.
c) closely related to other interest rates
d) achieve greater efficiency in the operation of the financial markets and thus, facilitate more effective & efficient pricing of financial products, especially with the proliferation of structured or customised products.
what does the MPC meeting process consist of?
a) Monetary Policy Committee (MPC)
- MPC members is made up of Governor, Deputy Governors & other senior officers appointed by the Board Governance Committee.
b) Monetary Policy Working Group
- members are representatives from all relevant departments who gather info, economic analysis &financial data, both domestic & international as input for deliberation by the MPC.
c) Investment Operations and Financial Market Department or Jabatan Operasi
Pelaburan Pasaran Kewangan (JOPPK)
- implements monetary policy decisions.
what are the main features of the new monetary operating procedures?
(a) The Overnight Policy Rate
(b) Overnight rate as the sole operating target
(c) Introduction of the Overnight Operating Corridor and Standing Facilities
(d) Monetary Policy Statement
(e) Standing facilities
what are the charateristics of The Overnight Policy Rate?
- indicator of the monetary policy stance
- plays dual roles:
(i) as a signalling device to indicate the monetary policy stance,
(ii) as a target rate for the BNM’s daily liquidity operations - changes in monetary policy stance will be through a change in the OPR.
- serves as the primary reference rate in determining other market rates.
why is overnight rate the sole operating target?
- BNM’s monetary operations will target the interbank overnight rate, thus its liquidity management operations will aim at influencing the interbank overnight rate to move close to the OPR
BNM’s liquidity operations doesn’t target any specific interest rate level. Therefore, interbank interest rates at other maturities will be determined by the market, reflecting demand & supply of funds & market expectations of interest rate movement.
what is the Overnight Operating Corridor?
- aimed at minimising excessive volatility in the overnight rate
- corridor is set at +/– 25 bps around the OPR.
- BNM’s daily liquidity operations will aim to hold the overnight rate close to the announced OPR
- BNM also provides standing facilities (to ensure the overnight rate fluctuates within the operating corridor):
a. lending facility at the upper end of the corridor
b. deposit facility at the lower limit - Interbank institutions can only make use of the standing facility for their overnight liquidity surplus or shortage positions after they have exhausted all avenues in the interbank market.
Summary of monetary operating framework using overnight rate (OR):
i. OR as the policy rate & operating target
ii. Operating band of 50 bps to minimize
extreme volatility
iii. Standing facility available at the ceiling & floor rate
iv. OR was chosen as the policy rate because of:
* High controllability
* Minimal expectation content
v. Market determined rates at other tenors.
what are the features of standing facility provided by BNM?
a. Lending facility at ceiling rate (OPR + 25 bps)
- done via repo, sell-buy back arrangement, collateralised murabahah, FX swap, etc.
b. Deposit facility at floor rate (OPR – 25 bps)
- clean basis
c. Eligible counterparties:
- All commercial banks, Islamic banks, investment banks & development financial institution under the DFIA
d. Eligible securities:
- securities issued by GOM & BNM
- securities with explicit guarantee by GOM/ EMEAP/non EMEAP-member governments with min investment grade international ratings of BBB-, whichever lower, as defined by Fitch, S&P and/or Moody’s;
e. Eligible currencies
- Home currency of countries that BNM has signed cross-border collateral arrangements (CBCA) with. Currently: SGD, THB
