By: Adesokan Mariam Mek-11a Monetary policy Monetary policy or credit policy is the process by which the monetary authority of a country controls the supply and availability of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. It employs a variety of methods to control outcomes like inflation, economic growth, currency exchange rates and lower unemployment. Contractionary or Tight Policy is the policy of decreasing the money supply and increasing interest rates to dampen the economy by discouraging bank loaning. Problem : Inflation Measures : • Central bank sells securities through open market operation • It raises CRR & SLR(Statutory liquidity ratio) bank rate Tools of Monetary Policy There are four basic tools or instruments of monetary policy which can be used to achieve economic & price stability by influencing aggregate demand or spending in the economy. These tools are: Open market operation. Changing the bank rate. Changing the cash reserve ratio. Undertaking selective credit controls. Monetary decisions in Ukraine today takes into account a wide range of factors such as: Short term interest rates Long term interest rates, Exchange rates, Credit quality, Bonds & equities (corporate ownership & debt), Govt. vs. Private sector spending/savings, International capital flows of money on large scale. National bank of Ukraine monetary policy indicators Monetary base Period Monetary base currency in circulation 1 2 3 2008 2009 2010 2011 2012 Including transferable deposits to transferable other deposits depositto other taking sectors corporations 4 outstanding amounts at end of period, in millions of hryvnias 186,671 167,538 18,623 194,965 170,536 23,183 225,692 200,092 24,404 239,885 209,565 29,185 255,283 222,786 31,158 5 510 1,246 1,195 1,135 1,340 Importance of Monetary Policy in Ukraine economy It regulates currencies and reserves. Manages the monetary and the credit system. Maintains the par value of domestic currencies. Promotes and maintains a high level of production, employment and economic growth. Ensures balance of equilibrium. Creates full employment. Regulates neutrality of money. Ensures equal income distribution. Problems of Monetary Policy in Ukraine economy The growth of money supply emission Delaying the measures to rein in inflation Using bonds as a major source of financing the budget deficit Reducing the surplus trade balance Slowdown in GDP growth The imbalance of public finances Types of monetary policy The distinction between the various types of monetary policy lies primarily with the set of instruments and target variables that are used by the monetary authority(NBU-National Bank of Ukraine) to achieve their goals. Types of monetary policy Monetary policy Target Market variable Long term objective Inflation Targeting Interest rate on overnight A given rate of change in debt the CPI Price Level targeting Interest rate on overnight A specific CPI number debt Monetary Aggregate Fixed exchange rate Gold standard The growth in money A given rate of change in supply the CPI The spot price of the The spot price of the currency currency The spot price of gold Low inflation as measured by the gold price Mixed policy Usually interest rates Usually unemployment +CPI change Current issues of monetary policy in Ukraine Monetary policy is currently a highly politicised issue in Ukraine. It is necessary to distinguish three fields: the stance, the instruments and the use of instruments of monetary policy. Stance: Inflation has certainly slowed down in recent times, but it is still rather high (14.1%). Inflation expectations are even higher (17% according to latest NBU information). Conclusions Policy makers usually call on the NBU to relax its restrictive policy stance. But a relaxation would create additional problems (higher inflation, weaker currency), without contributing much in supporting the real sector. The presence of a credit crunch is mainly due to a lack of confidence, not a lack of liquidity. Consequently, there are lack of access by several banks to NBU's loans and it is highly problematic. It is crucial that all banks are treated in the same way.