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MONETARY POLICY • “Monetary Policy is defined as the setting of interest rates, in order to control the quantity of credit and money supply, to influence the level of economic activity” • There are 3 tools available under this policy: 1. Official Cash Rate 2. Open Market Operations NOT USED MUCH THESE DAYS 3. Jawboning 7.25% 6.75% RESERVE BANK -200 +200 BNZ OCR 7% Fa’aoge’s Account WESTPAC Anna’s Account -200 +200 BNZ Cheque Pay Anna $200 OFFICIAL CASH RATE HOW DOES IT WORK? • The Official Cash Rate (OCR) is an interest rate set by the Reserve Bank to implement monetary policy, so as to maintain price stability. • The OCR review is done 8 times in a year. • By setting the OCR, the Reserve Bank is able to substantially influence short-term interest rates, such as the 90-day bill rate, floating mortgages etc. • In turn, this influences the overall level of economic activity in the country and therefore inflation. • When an OCR is announced - it is a percentage number – 7.25% • This means Reserve Bank undertakes to pay financial institutions an interest rate 0.25 per cent below the OCR for money deposited in Reserve Bank settlement accounts ie 7.00% • The Reserve Bank also undertakes to Lend overnight cash to banks against good security, charging interest at 0.25 per cent above the OCR – ie 7.50% • The effect of this is that no commercial bank is likely to offer short-term loans at a rate significantly higher than the Official Cash Rate. Why? • Because other banks would undercut that, using credit from the Reserve Bank. • Similarly a bank is not likely to lend shortterm at below the OCR because the same bank can lend to the Reserve Bank and receive interest at the OCR level. • By controlling short-term interest rates in this way, the Reserve Bank can influence short-term demand in the economy, and by that put pressure upwards or downwards on average prices. OPEN MARKET OPERATIONS • Reserve Bank participates in the financial market on a daily basis. • It does this to maintain the right amount of cash that is available to all the banks to settle each others debts. • It does this by injecting money into the money market or by soaking it up. • This is done through buying existing securities from the banks – (injecting) or selling securities to them – (soaking up). JAWBONING • The method used by the Governor of RBNZ by talking to the Business sector. • This involves dropping hints about future OCR movements. • It also involves sending messages to consumers about their spending and saving patterns. • These statements may or may not be backed up with actions.