Reserve Bank of Vanuatu

Home Monetary Policy Implementation

Monetary Policy Implementation

The functions of monetary policy implementation are largely carried out by the Financial Markets Department (FMD).

These responsibilities include reserves, exchange rates, and liquidity management and forecasting and operations in the money market aimed at creating monetary conditions consistent with the stance of monetary policy of the Reserve Bank.  The Reserve Bank uses its domestic Open Market Operations (OMO) to fine tune the level of liquidity in the banking system.
The Department has External Markets and Domestic Markets units and reports to the Bank’s Investment Committee and the Monetary Policy Committee for policy functions and to the Management for operational matters.

The Bank relies largely on OMO for policy intervention. OMO are conducted on a weekly basis through issue of RBV securities. The level of issue is set by the Auction Committee based on the short-term liquidity projections done by the Domestic Market Unit. The policy target for open market operations is the volume of banks’ excess reserves. In 2009, the target level was set at VT2,400 million and in 2010 was made flexible due to different liquidity distributions of banks.

Conducting monetary policy implies that the Reserve Bank has several monetary instruments at its disposal. The instruments are mainly used to affect the commercial banks’ liquidity - the money at the commercial banks’ disposal that can be used for credit lending is commonly known as liquidity. In affecting the banks’ liquidity, the Reserve Bank is able to control the total amount of credits. If there is too much liquidity in the financial system, interest rates will tend to decline and the demand for loans to increase and vice-a-versa.