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1. GOVERNMENT’S MONETARY
POLICY

2. Introduction
Monetary Policy
The measures focused on regulating money supply
- control inflation and stabilize currency.
A tool whereby central banks influence the
economy by affecting interest rates and exchange
rates.
“The set of procedures and measures taken by
monetary authorities to manage money
supply, interest and exchange rates and to
influence credit conditions to achieve certain
economic objectives”.

3. Monetary Functions
• Promoting monetary stability due to the
developments in the economy.
• Formulated and implemented autonomously
by the Bank without any external influence

4. Goal of Monetary Policy
• Price stability
• Strong sustainable output growth
• Low level of unemployment
• Satisfactory balance of payments position

5. Purposes of Conducting Monetary Policy
Operations of the Bank
• May issue securities in its own name.
• May purchase, sell and redeem securities
issued by the Bank.
• May require a reserve to be held at the Bank
by each financial institution.
• May undertake such other financial
transactions or financial instruments as
approved by the Monetary Policy Committee.

6. Purposes of Conducting Monetary Policy
Operations of the Bank
• Have the powers:
– To enter into contract
– Borrow money
– Accept assets as collateral,
– Act as agent or banker for open and maintain
accounts for accept any deposit of gold or
money
– Purchase, sell or repurchase any certificate of
deposit issued by any financial institutions etc.

7. Conflicts of Monetary Policy
• Promote some of these goals often aggravate
problems in trying to pursue other goals.
• Accepting trade-off among multiple goals.
– E.g. to control inflation & protect currency –
unemployment & slower economic growth.

8. How Monetary Policy Works?
Lending rate Purchase of
More homes
on housing houses are
loans go ↓ encouraged are built
Reduce
Economic
interest rate
(OPR) activity
rises
Deposit rates Savings are Consumption
go ↓ discouraged increases

9. BNM Reduces OPR to Stimulate the Economy
Economic Interest
growth rates
below
potential
O
Economic
Activity
P
R
Inflation
Very Low
Loans
Balancing growth MP actions Financial sector Household &
& inflation businesses

10. BNM Increases OPR to Constrain the Economy
Economic Interest
growth rates
exceed
potential
Inflation &
Economic
O
Activity
P
R
Inflation Loans
too high
Balancing growth MP actions Financial sector Household &
& inflation businesses

11. OPR Decisions
Overnight Policy Rate (OPR)
Change in OPR New OPR level
Date
(%) (%)
8-Sep-11 0 3
7-Jul-11 0 3
5-May-11 0.25 3
11-Mar-11 0 2.75
27-Jan-11 0 2.75
12-Nov-10 0 2.75
2-Sep-10 0 2.75
8-Jul-10 0.25 2.75
13-May-10 0.25 2.5
4-Mar-10 0.25 2.25
26-Jan-10 0 2

12. Key Instruments of Monetary Policy
Statutory Reserve Liquidity Assets
Requirements (SRR) Requirements (LAR)
• Control liquidity situation in the • Expressed as a
banking system - eligible liabilities percentage of the
• Level of deposits and loans that a eligible liabilities (EL)
bank can legally support given the base of the banking
size of its reserves
institutions
• Reduced in an expansionary
monetary policy and vice-versa • Operates in a similar
manner as the SRR
• Safety net put in place for the
protection of depositors

13. Monetary Policy Statement (MPS)
• Forward-looking statement outlining the
monetary policy stance of BNM in the near
term and the rationale for the policy thrust.
• Any change in the OPR will be announced in
MPS.
• At the Monetary Policy Committee (MPC)
meeting (8 Sept 2011), Bank Negara

14. Objective for issuing an MPS
• To provide greater understanding of the
monetary policy objectives and measures in
light of a more complex and dynamics
environment.
• Help anchor expectations on growth and
inflation.
• Aimed at increasing the understanding and
appreciation of money market participants.
• Facilitating a more rapid transmission of the

15. Reserves Method
Excess Reserves = Actual Legal reserve –
Required Reserves
• Required reserves = Legal reserves
requirement x Reserves requirement
• Actual legal reserve holdings = Federal reserve
account + Vault cash

16. EXAMPLE 1
• A bank holds $100 million in the form of
transaction and time and saving deposits. Its
reserve deposit at the federal reserve bank
during the current reserve maintenance period
contains a daily average balance of $5 million an
its vault cash holdings have averaged daily $
500,000 for several week running. Calculate its
required reserves and excess reserves if deposits
are subject to a 5% legal reserve requirement.

17. Affect Deposit Institution
• The size of the transaction deposit
multiplier
= 1
RRD + CASH+ EXR + (RRT X TIME)
• Value of the money multiplier
= 1 + CASH
RRD + CASH+ EXR + (RRT X TIME)

18. EXAMPLE 2
• Assume that the public wishes to hold
RM0.60 in pocket money and RM0.30 in
time deposits. Depository institution plan
to keep RM0.20 in excess reserve for each
ringgit of transaction money received. If
reserves requirement on transaction
deposit and time and saving deposit are 5
percent. Calculate:
• The size of the transaction deposit
multiplier
• Value of the money multiplier