The conduct of monetary policy in Fiji has always been a topical subject among policymakers in the public and private sectors. While the conduct of monetary policy itself has undergone significant transformation over the last three decades, there is little understanding on how changes in the monetary policy stance of the central bank is actually passed on to other economic variables. This article outlines how the conduct of monetary policy in Fiji is transmitted from the Reserve Bank of Fiji’s (RBF) policy indicator rate (PIR) through to interest rates in the economy and finally to economic activity and its impact on inflation and foreign reserves.
What is the Policy Indicator Rate? The policy indicator rate establishes the RBF’s operating objective for monetary policy implementation. The RBF uses the 91 – day RBF Notes rate as its policy indicator rate and this is currently set at 1.75 percent. The RBF’s policy indicator rate is used as a benchmark to signal it s policy intentions and is quite similar to that of many other countries such as the Overnight Cash Rate in Australia and the US Federal Funds rate. The rate is set in line with the Bank’s objective of low inflation and an adequate level of foreign reserves.
When the actual 91-day RBF Notes is not aligned to the policy indicator rate, the Bank exerts pressure either by the sale or purchase of small amounts of RBF notes in the market. This process is called “open market operations” (OMO). The open market operations will be conducted to withdraw liquidity from the system until the actual; interest rate is in alignment with the PIR. By maintaining continuous pressure through this process, the RBF is able to influence interest rates up or down.