By: By: Adesokan MariamAdesokan Mariam

Mek-11aMek-11a

Monetary policy or credit policy is the process by which the monetary authority of a country controls the supply and availability of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.

It employs a variety of methods to control outcomes like inflation, economic growth, currency exchange rates and lower unemployment.

Monetary policy

Contractionary or Tight Policy is the policy of decreasing the money supply and increasing interest rates to dampen the economy by discouraging bank loaning.

Problem : Inflation

Measures :

•Central bank sells securities through open market operation

•It raises CRR & SLR(Statutory liquidity ratio) bank rate

There are four basic tools or instruments of

monetary policy which can be used to achieve economic & price stability by influencing aggregate demand or spending in the economy. These tools are:-

Open market operation. Changing the bank rate. Changing the cash reserve ratio. Undertaking selective credit controls.

Tools of Monetary Policy

Monetary decisions in Ukraine today takes into account a wide range of factors such as:Short term interest ratesLong term interest rates,Exchange rates,Credit quality,Bonds & equities (corporate ownership & debt),Govt. vs. Private sector spending/savings,International capital flows of money on large scale.

National bank of Ukraine monetary policy indicatorsMonetary base

Period Monetary base

Including

currency in circulation

transferable deposits to

other deposit-taking

corporations

transferable deposits

to other sectors

1 2 3 4 5

 outstanding amounts at end of period,

in millions of hryvnias  2008 186,671 167,538 18,623 5102009 194,965 170,536 23,183 1,2462010 225,692 200,092 24,404 1,1952011 239,885 209,565 29,185 1,1352012 255,283 222,786 31,158 1,340

It regulates currencies and reserves. Manages the monetary and the credit system. Maintains the par value of domestic currencies. Promotes and maintains a high level of

production, employment and economic growth. Ensures balance of equilibrium. Creates full employment. Regulates neutrality of money. Ensures equal income distribution.

Importance of Monetary Policy in Ukraine economy

The growth of money supply emission Delaying the measures to rein in inflation Using bonds as a major source of financing the

budget deficit Reducing the surplus trade balance Slowdown in GDP growth The imbalance of public finances

Problems of Monetary Policy in Ukraine economy

The distinction between the various types of monetary policy lies primarily with the set of instruments and target variables that are used by the monetary authority(NBU-National Bank of Ukraine) to achieve their goals.

Types of monetary policy

Monetary policy Target Market

variable

Long term objective

Inflation Targeting Interest rate on

overnight debt

A given rate of change

in the CPI

Price Level targeting Interest rate on

overnight debt

A specific CPI number

Monetary Aggregate The growth in money

supply

A given rate of change

in the CPI

Fixed exchange rate The spot price of the

currency

The spot price of the

currency

Gold standard The spot price of gold Low inflation as

measured by the gold

price

Mixed policy Usually interest rates Usually unemployment

+CPI change

Types of monetary policy

Monetary policy is currently a highly politicised issue in Ukraine. It is necessary to distinguish three fields: the stance, the instruments and the use of instruments of monetary policy. Stance: Inflation has certainly slowed down in recent times, but it is still rather high (14.1%). Inflation expectations are even higher (17% according to latest NBU information).

Current issues of monetary policy in Ukraine

Policy makers usually call on the NBU to relax its restrictive policy stance. But a relaxation would create additional problems (higher inflation, weaker currency), without contributing much insupporting the real sector. The presence of a credit crunch is mainly due to a lack of confidence, not a lack of liquidity.Consequently, there are lack of access by several banks to NBU's loans and it is highly problematic. It is crucial that all banks are treated in the same way.

Conclusions