The Bank has the power to announce the minimum and maximum rates of interest and other charges that domestic banks may impose for specific types of loans, advances or other credits and pay on deposits. Currently, the Bank does not set any interest rate levied by domestic banks except for the minimum interest rate payable on savings deposits. The Bank has opted not to use this as a tool of monetary policy but to let market forces determine interest rate.
The Bank has the power to control the volume, terms and conditions of domestic bank credit, including installment credit extended through loans, advances or investments. The Bank has not exercised such controls in its implementation of monetary policy.
Lending to domestic banks
The Bank may provide credit, backed by collateral, to domestic banks to meet their short-term liquidity needs as lender of last resort. The interest is set at a punitive rate to encourage banks to manage their liquidity efficiently.
The Bank uses reserve requirements to limit the amount of funds that domestic banks can use to make loans to its customers. Domestic banks are required to hold a proportion of customers’ deposits in approved liquid assets. An increase in the reserve ratios should reduce domestic banks’ lending and, therefore, the demand for hard currency, while a decrease should yield the opposite effect.
Secondary reserve requirement
The secondary reserve requirement is a certain percentage of domestic banks’ deposit liabilities that is to be held in approved liquid assets. It should be freely and readily convertible into cash without significant loss, free from any charge, lien or encumbrance.
Cash reserve requirement, also called primary reserve requirements
The cash reserve requirement, also called primary reserve requirements, is a percentage of domestic banks’ average deposit liabilities that must be held at the Bank in a non-interest bearing account. Cash reserves are a component of the secondary reserve requirements.
To encourage the development of the government securities market, a securities requirement was instituted on 1 May 2010, requiring domestic banks to hold a proportion of their average deposit liabilities in the form of Treasury bills. The securities requirement is also a component of the secondary reserve requirements.
The conduct of open market operations refers to the purchase or sale of government securities by the Bank to the banking and non-banking public for liquidity management purposes. When the Bank sells securities, it reduces domestic banks’ reserves (monetary base), and when it buys securities, it increases banks’ reserves.
