Monetary Policy Instruments

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.