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How Monetary Policy Works

For Fiji, the Reserve Bank conducts monetary policy to achieve their monetary policy objectives. Monetary policy uses a variety of tools or instruments to influence interest rates, credit and monetary
27 Jun 2015 09:01
How Monetary Policy Works

For Fiji, the Reserve Bank conducts monetary policy to achieve their monetary policy objectives. Monetary policy uses a variety of tools or instruments to influence interest rates, credit and monetary aggregates, which then affect economic activity, inflation and foreign reserves.
The Reserve Bank uses both direct and indirect tools to implement monetary policy. Direct instruments mainly involve the use of a statutory reserve deposit (SRD) ratio, directed lending and regulation of interest rate margins while indirect instruments largely involve the use of open market operations.
The common monetary policy instrument’s used in Fiji are:
1. Reserve Requirements
2. Discount Window
3. Open Markets Operation
4. Moral Suasion
It is important to know how monetary policy can be effective in the management of the economy as a whole when it operates through such a short-term interest rate. In practice, changes in the OPR (Overnight Policy Rate) should have a strong influence on other interest rates, which in turn affects economic activity and ultimately aligns monetary policy objectives.
Monetary policy affects economic activity in Fiji through transmission mechanism. Under the current monetary policy framework, there are three main stages of how monetary policy affects the wider economy and by extension the goals of monetary policy.
Finally the performance of monetary policy conducted by RBF is judged on the achievement of the two objectives of low and stable inflation and a comfortable level of foreign reserves, which lay the platform for macroeconomic stability that will bring about improved standards of living for all of Fiji’s citizens.
Over the past four years, the Reserve bank had a very accommodative monetary policy stance. This means that it reduced its Overnight Policy rate from 3.00% to 0.50%. This reduction in the policy rate has resulted in the following:

-Reduction in commercial bank lending rate to a record low of 5.70%;
-5 years of consecutive economic growth and the economy is poised to grow for the 6th consecutive year in 2015;
-Growth during this period is above our historical average;
-Foreign reserves remain comfortable with current foreign reserves level above $1.9 billion or sufficient to cover almost 5 months of import cover; and
-Inflation rate has been declining and was 0.6% in May 2015.

This is an informative publication, sponsored by The Fiji Sun, Fiji Bureau of Statistics and HFC Bank. All views expressed or implied are purely of the Treasurer at HFC Bank, Peter Fuata.




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