About Monetary Policy
Monetary Policy is one of macroeconomic policies used by the Government to primarily influence changes in price and ensure financial stability and, secondarily to support economic growth. Monetary policy is the responsibility of a monetary authority or central bank like the Bank of Papua New Guinea. The conduct of monetary policy aims at influencing the supply of money or price of money, which is the interest rate, which in turn influences the demand for money. It involves either the direct control or indirect influence of monetary variables such as money supply and interest rates by the monetary authority to affect macroeconomic variables, including the price level and output. In essence, monetary policy tries to strike a balance between the supply of and demand for money such that there is neither too much money nor too little money in the banking system and in circulation, that it supports some rate of economic growth while it is not inflationary. A change to a particular monetary policy instrument indicates the stance in domestic monetary policy.
The Monetary and Economic Policy Group is responsible for the design and formulation of monetary policy, while the Financial Markets Department of the Financial Operations Group implements the policy.
The Monetary and Economic Policy Group is headed by an Assistant Governor and there are two departments, Economics and Research. The Economics department comprises the Monetary Policy Unit, Balance of Payments Unit, International Transaction Monitoring Unit and Research Library. The Research Department has the Economic Analysis Unit and Projects Unit.
Objectives of Monetary Policy
The objective of monetary policy in Papua New Guinea (PNG), as stipulated in the Central Banking Act 2000 (Section 7) is to achieve and maintain price stability. This involves low inflation supported by stable interest and exchange rates. The maintenance of price stability leads to:
• Confidence in the kina exchange rate and management of the economy;
• A foundation for stable fiscal operations of the Government;
• Certainty for businesses to plan for long-term investment, and
• A stable macroeconomic environment conducive to economic growth.
Experiences from both developing and industrialised countries show that low inflation helps to promote economic efficiency and growth in the long run, while the adverse impact of high inflation on the economy has been recognized to be harmful to consumers and economic growth.
Formulation of Monetary Policy
The Bank releases two Monetary Policy Statements (MPS) each year, as required under the CBA 2000, the first on 31st March and the second on 30th September.
Expected developments in the global economy and their implications for the domestic economy, through the balance of payments, fiscal operations of the Government, monetary aggregates, real sector (economic activity), exchange rate and ultimately the impact of these variables on inflation are considered in the formulation of monetary policy.
On a monthly basis the Bank considers developments in the same areas for the setting of the policy signaling rate, the Kina Facility Rate (KFR). Analysis of the quarterly Consumer Price Index (CPI), released by the National Statistical Office (NSO) and the Bank’s own Retail Price index (RPI) are key inputs for the determination for the KFR.
The RPI is compiled from data collected by BPNG each month from selected major supermarkets in Port Moresby, as well as data on the price-controlled items from the Independent Consumer & Competition Commission (ICCC). The Bank also collects other price data on various items such as electricity, telecommunication, transport, water and sewerage and postal charges.
The Bank’s estimates and projections of gross domestic product, balance of payments, and inflation are discussed in consultative meetings with the Treasury department for the latter’s formulation of fiscal policy, especially the Government’s National Budget.
Implementation of Monetary Policy
Monetary policy is managed within a reserve money framework. Reserve money comprises currency in circulation and deposits of commercial banks with the Bank of PNG. The Monetary Policy Statement provides the overall monetary policy stance, while the monthly KFR signals this stance or any changes through an announcement by the Governor. Following the KFR announcement, Open Market Operations (OMOs) are conducted to implement the stance.
OMOs involve the trade in Government securities with the auctioning of Central Bank Bills (CBBs), Treasury bills and Inscribed stocks to Other Depository Corporations and the general public and Repurchase Agreements (Repo) transactions between commercial banks and the Bank of PNG. OMOs is the main instrument of implementing monetary policy. The Bank also uses its direct policy instrument, the Cash Reserve Requirement (CRR), for liquidity management.
The Bank of PNG operates a CBB Tap facility to allow small retail investors to participate in the securities market and help develop a savings culture in the country.