Monetary policy is the management of money supply and interest rates by central banks to influence prices and employment. It works through expansion or contraction of investment and consumption expenditure.
The Bangladesh Bank Order of 1972
outlines the main objectives of monetary policy in Bangladesh, which comprises—
Ø
To achieve the price stability (control
of inflation)
Ø
To regulate currency and reserves (exchange
rate stability)
Ø
To promote and maintain a high level of
production, employment and real income, and economic growth, since independence
BB operated under a variety of pegged exchange rate systems amid capital
controls
Ø
To manage the monetary and credit system
Ø
To maintain the par value of domestic currency
Ø
To promote growth and development of the
country's productive resources in the best national interest. (economic
growth)
Ø
Although the long term focus of monetary
policy in Bangladesh is on growth with stability, the short-term objectives are
determined after a careful and realistic appraisal of the current economic
situation of the country.
Major instruments of monetary control
available with Bangladesh Bank are the bank rate, open market operations,
rediscount policy, and statutory reserve requirement.
The methods of credit control can be
classified as follows:
a) Quantitative/ General credit control
measures include:
v
Bank rate policy
v
Open market policy
v
Variation of reserve ratio
b) Qualitative/selective credit control
measures include:
v
Prescription of margin requirements
v
Consumer credit regulation
v
Moral suasion
v
Direct action
v
Credit rationing
a) Quantitative/ General Methods:
The methods by which Central Bank controls the
total amount of credit in the economy are termed as quantitative methods of
credit control.
Bank rate policy: The
rate at which the central bank advances loans to the commercial banks.
Bank rate is also called as the discount rate. To contract money supply, bank
rate is increased and vice versa.
Open market operation: The
sale or purchase of securities by the central bank to withdraw liquid funds
from the banking system (commercial banks) or inject the same into that system.To
increase the money supply, the Central bank buys securities from commercial
banks and public and vice versa.
Varying reserve requirements:
There are two ratios (CRR & SLR) by changing those central bank control
money supply. All the commercial banks have to maintain a certain percentage of their deposits as cash reserves with the
central bank is called cash reserve ratio (CRR). Statutory Liquidity Ratio
(SLR) refers to the amount that the commercial banks require to maintain in the
form of cash, or gold or govt. approved securities before providing credit
to the customers. To increase money supply, central bank reduces CRR & SLR
ratios and vice-versa.
b) Qualitative/selective credit control measures include:
Prescription of
margin requirements: Generally,
commercial banks give loan against ‘stocks or ‘securities’. While giving loans
against stocks or securities they keep margin. Margin is the difference between the market value of a security and its
maximum loan value. Let us assume, a commercial bank grants a loan of Rs.
8000 against a security worth Rs. 10,000. Here, margin is Rs. 2000 or 20%. To reduce money supply, margin requirements
are increased and vice versa.
Consumer credit regulation: Now-a-days, most of the consumer durables like T.V.,
Refrigerator, Motorcar, etc. are available on installment basis financed
through bank credit. Such credit made
available by commercial banks for the purchase of consumer durables is known as
consumer credit. If there is
excess demand for certain consumer durables leading to their high prices, central bank can reduce consumer credit by
(a) increasing down payment, and (b) reducing the number of installments of
repayment of such credit and vice versa.
Moral suasion:Moral suasion means persuasion and
request. To arrest inflationary
situation central bank persuades and request the commercial banks to refrain
from giving loans for speculative and non-essential purposes. On the other
hand, to counteract deflation central bank persuades the commercial banks to
extend credit for different purposes.
Direct Action: This method is accepted
when a commercial bank does not co-operate the central bank in achieving
its desirable objectives. Direct action may take any of the following forms:
Central banks may charge a penal (punishing) rate of
interest over and above the bank rate upon the defaulting banks; may refuse to rediscount the bills of those
banks; may refuse to grant further
accommodation.
Credit rationing: Refers to the situation where Central Bank (lender) limit the supply of additional credit to
Commercial Banks (borrowers) who demand funds, even if the latter are
willing to pay higher interest rates.
A repo or repurchase
agreement: is an instrument of
money market. Repo is a collateralized lending i.e. the commercial banks which borrow money from central bank by selling
securities to meet short term needs with an agreement to repurchase the same at
a predetermined rate and date. The central bank charges some interest rate
on the cash borrowed by banks, but this rate (called repo rate) will be less
than the interest rate on bonds.
Reverse repo: In a reverse repo central
bank borrows money from commercial banks by lending securities. The
interest paid by central bank in this case is called reverse repo rate.
The Money Measures
announced by central bank were as follows-
1)
M 1 :
Cash + Net Demand Deposits + Other Deposits with central bank
2)
M 2 :
M 1 + Post Office Saving Deposits
3)
M 3 :
M 2 + Net Time Deposits With Banks