INTERNATIONAL CONFERENCE ON MONETARY POLICY FRAMEWORKS IN DEVELOPING COUNTRIES: PRACTICE AND CHALLENGES EXPERIENCE OF RWANDA

INTERNATIONAL CONFERENCE ON MONETARY POLICY FRAMEWORKS IN DEVELOPING COUNTRIES: PRACTICE AND CHALLENGES EXPERIENCE OF RWANDA Kigali, Serena Hotel, J...
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INTERNATIONAL CONFERENCE ON MONETARY POLICY FRAMEWORKS IN DEVELOPING COUNTRIES: PRACTICE AND CHALLENGES

EXPERIENCE OF RWANDA

Kigali, Serena Hotel, July 20th , 2012

OUTLINE 2

I.

BNR MONETARY POLICY BACKGROUND

II.

MONETARY POLICY FRAMEWORK

III.

MONETARY POLICY INSTRUMENTS

IV.

MONETARY POLICY COMMUNICATION STRATEGY

V.

POLICY COORDINATION: DEAL WITH SUPPLY SHOCKS

VI.

ACHIEVEMENTS

VII.

CHALLENGES

VIII.

WAY FORWARD

I. BNR MONETARY POLICY BACKGROUND 3

   



BNR is an independent Central Bank Main missions of the BNR: Ensure and maintain price stability; Enhance and maintain a stable and competitive financial system without any exclusion; Support Government’s general economic policies, without prejudice to the two previous missions.

BACKGROUND (CTD) 4

  



To achieve its mission, BNR shall : Define and implement the monetary policy; Supervise and regulate the financial sector: banks, microfinance institutions and pension funds institutions; Supervise and regulate payment systems.

BACKGROUND (CTD) 5



  

BNR monetary policy framework can be grouped into 3 distinct time periods: 1964-1990: use of direct monetary instruments; 1990-1995: transition to financial liberalization Since 1995: Use of indirect monetary policy instruments

BACKGROUND (CTD) 6



In this presentation, we focus on the BNR experience in monetary policy formulation and implementation during the recent period ( 1995-2012)

MONETARY POLICY FRAMEWORK 7



  

Current Monetary Policy Framework: monetary targeting regime, since 1995 Nominal anchor: Broad money, M3 Operating target: Reserve money Ultimate objective: Price stability

MONETARY POLICY FRAMEWORK (CTD) 8

 The monetary policy transmission mechanism can be illustrated as

follow (from the quantity of reserve money to inflation):

Instruments

Intermediate target

Base Money or interest rate

Monetary aggregates Feedback

Primary objective

Price Stability

Long run stable relationship

MONETARY POLICY FRAMEWORK (CTD) 9

 

  

Formulation and implementation framework: Annual monetary programs under PSI since 2010 following PRGF;

Key assumptions: Stability and predictability of money multiplier Stability of money demand: link between M3 and inflation

MONETARY POLICY INSTRUMENTS 10

   

   

Open market operations: Repos: for liquidity absorption; Reverse-Repos: for liquidity injection; Key Repo rate (KRR) is the central bank rate: its change is decided by the Monetary Policy Committee ( MPC) T-bills (4 weeks, 13 weeks, 26weeks and 52 weeks…); Lending and deposit standing facilities Discount window (KRR+4%) Reserve Requirements

MONETARY POLICY COMMUNICATION STRATEGY 11



  



Since 2010, BNR has significantly improved its monetary policy communication strategy with the public. Main objectives: Influence economic agent’s expectations; engage the public support for the long run goal of price stability; Increase the transparency and accountability of BNR.

MONETARY POLICY COMMUNICATION STRATEGY (CTD) 12

 









Tools of communication strategy: Communication of MPC decisions: briefing to MDs of banks, press release, press conferences, publications, etc… Monetary policy and Financial Stability Statement by the Governor (in Kigali and provinces): At the beginning of the year: Assessment of the previous year and announcement of the programme of the year. A mid term review: to assess the achievement after the first half of the year. Financial awareness campaign

POLICY COORDINATION: DEAL WITH SUPPLY SHOCKS

13







To achieve its goal of price stability BNR has played an important role in: Bringing on board key stakeholders involved in economic management to coordinate policies and actions to mitigate the impact of supply shocks on inflation. Strengthened coordination between monetary and fiscal policies by a joint BNR/MINECOFIN Treasury Management Committee

ACHIEVEMENTS 14



BNR monetary policy has contributed to achieve low and relatively stable inflation

Chart 1: Link between M3 and inflation (overall stability of money demand)

ACHIEVEMENTS (CTD) 15

Link between Reserve money and M3: BNR controls M3 through Reserve Money.



Chart 2: Stability of the money multiplier 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06 rm

Dec-07 m3

Dec-08

Dec-09

Dec-10

Dec-11

-5.0

-20.0

Feb-95 Jul-95 Dec-95 May-96 Oct-96 Mar-97 Aug-97 Jan-98 Jun-98 Nov-98 Apr-99 Sep-99 Feb-00 Jul-00 Dec-00 May-01 Oct-01 Mar-02 Août 02 Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12

VI. ACHIEVEMENTS (END)

16

Chart 3: M3 and Reserve money, monthly changes

25.0

20.0

15.0

10.0

5.0

0.0

-10.0

-15.0

var RM var M3

VII. CHALLENGES 17









Since recently, there is indication of instability of money demand and money multiplier ( in short term); Weak monetary transmission mechanism and important lag in the relationship between money supply and prices ; Dominance of currency in circulation out of BNR (70.0% in average) in the Reserve Money; Financial sector not yet well developed.

VIII. WAY FORWARD 18









Introduction of flexibility in the monetary targeting regime, such as a range of targeted aggregate instead of a fixed level. Development of the Financial sector to improve the transmission mechanism; Development of payment systems to reduce the level of currency in circulation out the banking system; Increase the BNR capacity in policy oriented researches.

19

THANK YOU FOR YOUR KIND ATTENTION

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