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In conducting Monetary Policy, the Reserve Bank has the following instruments at its disposal:

• Statutory Reserve Deposit  – the Statutory Reserve Deposit (SRD) implies that banks have to maintain a certain percentage of the money that they hold on deposit with the Reserve Bank. The SRD applies to all demand, time and savings deposits in vatu and 50 percent of demand deposits in foreign currency. These deposits broadly cover the money stock that is considered to be relevant for the national economy.

• Reserve Bank of Vanuatu Notes through Open Market Operation –  Since the beginning of 1998, the Reserve Bank has issued so-called Reserve Bank of Vanuatu notes (RBV notes). These notes are actually certificates, which commit the Reserve Bank to repay the buyer of the notes at maturity the principal plus interest. In previous years, the Reserve Bank publicly offers the certificates through advertisements in the newspaper but currently via email, since it is mainly the banks that buy them. The Financial Markets Department of the Bank is responsibility for the issuance the RBV notes on a regular basis, often at the approval of the Auction Committee. In issuing the notes, the Reserve bank seeks to absorb the excess liquidity that is not bound by SRD requirements.

• Lender of Last Resort and Central Banks Credits – it is possible that banks fall short of liquidity. This might happen when banks extend loans in excess of their available funds (deposits). Under these circumstances the Reserve Bank can provide temporary liquidity. It does so in its capacity as ‘lender of last resort’. The Reserve Bank gives the banks the opportunity to borrow under the Rediscount and Repurchase Facilities. The interest rate applied to the Rediscount and Repurchase Facilities is the rediscount rate.

• Rediscount rate (RBV Official rate) – the rediscount rate is the Bank’s ‘official’ interest rate. By increasing or reducing the rate the Reserve Bank makes it more or less expensive for the banks to borrow from the Reserve bank. The rediscount rate also gives an indication of the Reserves Bank’s monetary policy stance. In increasing the rate, the Reserve Bank indicates that it is tightening monetary policy, by decreasing the rate that it is easing monetary policy. Currently the rediscount rate stands at 2.90 percent.

Another important function of the Reserve Bank is to provide advisory services to the Ministry of Finance and Economic Management. Actions to coordinate fiscal policy (Ministry of Finance) and monetary policy (Reserve Bank) include the Reserve Bank informing the Minister on monetary developments and in return receiving updates on the government’s budget. These exchanges are done primarily through monthly cash flow meetings with the Treasury Department and the quarterly Macroeconomic Committee meetings. The Reserve Bank is also the principal banker of the Government. As such, the Government can deposit funds with the Reserve Bank (collected taxes) and make withdrawals to make payment for wages and goods and services. The Reserve Bank can also temporarily lend money to the government through the Government Overdraft Facility with the Reserve Bank

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.

The Department of Research and Statistics (DRS) of the Bank is responsible for policy formulation.  Formulation begins with regular surveillance of key economic variables in the international economy, domestic economic activity, price developments, fiscal policy, monetary developments, exchange rate movements and the balance of payments.  These variables are assessed in terms of their impact on inflation and international reserves, which are the ultimate monetary policy objectives of the Reserve Bank. Assessments are submitted to the Policy Coordinating Committee (PCC), comprising of staff of the Research and Statistics Department (RSD), and chaired by its Director of RSD, and the meeting is also attended by the Director of Financial Market Department (FMD).  It meets once a month and its primary role is to provide advice on monetary policy to the Monetary Policy Committee (MPC) of the Reserve Bank.

The Monetary Policy Committee approves the policy stance of the Bank and notifies the Board of the Reserve Bank through its Chairperson. The Monetary Policy Committee comprises the Governor who is also the Chairperson of the Committee, the Deputy Governor, Director of Research and Statistics, the Director of Accounts and Customer Services, the Director of Financial Markets Department and the Director of Financial Institution Supervision Department. The role of the MPC is approving the monetary policy stance of the Reserve Bank.  The MPC meets monthly.

The Board of the Reserve Bank is the ultimate decision making body.  It comprises of four members, namely the Governor, who holds the chair and three other representatives, one of which is a representative of the Ministry of Finance and Economic Management.  The Board can meet as many times as it considers necessary but not less than four times in one year.

Once the MPC decides on a policy, the Reserve Bank conveys the stance to the public along with the reasons, in the Bank’s view, as to why the decision was taken.  This view is conveyed through regular meetings between the Governor and the Minister of Finance and Economic Management, the Governor’s Quarterly Meeting with the Bankers Association of Vanuatu and through various publications, press releases, and the Reserve Bank website. The press release to the public comes in the form of a Governor’s Monetary Policy Statement.