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Monetary Policy Framework

Since November 2008, the Monetary Policy Framework has been based on monetary aggregate targeting rather than the previous exchange rate targeting regime. This transition was to support a liberalised foreign exchange market and floating exchange rate regime as part of IMF-supported economic reform program adopted by the authorities in November 2008.

In this framework, the final target - price stability - is to be achieved by influencing the intermediate target of money supply growth, with reserve money being the operating target for the conduct of monetary policy. As a consequence of this new monetary targeting system, financial prices, such as interest rates and exchange rates are free to fluctuate and are determined by market forces. In that respect, the Bank had to eliminate all its administrative controls and focus on monitoring developments in the monetary and financial markets so as to intervene when necessary to avoid disruptive fluctuations.

Between 2008 and 2013, quarterly reserve money targets were set and to achieve them, the Bank primarily relied on its market operations to adjust liquidity levels to be at the target. Following a transitional phase in the first quarter of 2014, whereby the Bank opted for stabilising the level of free reserves held by banks, the Bank currently conducts monetary policy using a revised monetary targeting framework. By adopting the revised framework, which emphasises consistency and a forward looking approach, the Bank will now have greater flexibility in the implementation of monetary policy. This shall strengthen the transmission mechanism, without the need for changes in the final, intermediate and operating targets.

Interventions for managing banks’ liquidity are guided by a Liquidity Monitoring Framework maintained by the Bank.

This framework identifies the factors which influence banks’ liquidity and is used to forecast future liquidity flows. The long-term objective is to strengthen the influence of interest rates on economic developments. As interbank and money markets develop, the Bank will place more emphasis on steering short-term interest rates.

The responsibility for formulating and implementing monetary policy rests with the CBS Board. To ensure the effective segregation of responsibilities and to place due emphasis on monetary policy decisions taken at Board level, the Board decided to replace the Monetary Operations Committee (MOC) by the Monetary Policy Technical Committee (MPTC). Nonetheless, the main responsibility of the committee remains to consider, advise and decide on issues primarily relating to the formulation and implementation of monetary policy within the general guidelines determined by the Bank’s Board.

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