MONETARY POLICY

MEASURES
&
CENTRAL BANK

How does the Central Bank control Money

Supply or Flow of Credit in the Economy?
Monetary Policy – the Policy
which is related with the Money
supply and credit availability of
the Economy.

- Quantitative instruments
- Qualitative instruments
 Quantitative Instruments
- which affect overall money supply in the
economy – do not direct or restrict the flow of
credit to some specific sectors of the economy.

• Open Market Operations (OMO)

• Required Reserve Ratio (RRR)
• Discount Rate(DR)
 OPEN MARKET OPERATIONS

• Refer to the sale and purchase of

securities in the open market by the
central bank through commercial
banks to public.
• Central bank sells the securities to
reduce the money supply.
• Central bank buys the securities to
increase the money supply.
Qualitative Instruments
- which focus on the alternative uses of credit in the
economy –direct or restrict the flow of credit to some
specific sectors of the economy.

• Required Margin Rate

• Moral Persuasion
 Selective Credit Controls
Used by the Fed(Qualitative Instruments)

• Moral suasion refers to the use of “arm-twisting”

or “jawboning” by central bank officials to
encourage lending institutions and the public to
conform with the spirit of its policies.
MORAL SUASION:
It is a combination of both
‘persuasion’ and ‘pressure’.
The Central bank tries to persuade
the commercial banks to follow its
directives of monetary policy.
Otherwise, it can pressurise them to
follow its policy directives.
 QUALITATIVE INSTRUMENTS
Margin Requirement:
The margin requirement of loan refers to
the difference between the current value of
the security offered for loans and the value
of loans granted.(Keperluan margin pinjaman merujuk
kepada perbezaan di antara nilai semasa keselamatan yang
ditawarkan untuk pinjaman dan nilai pinjaman yang boleh
diberikan.)
eg. Mortgaged article worth RM100 with the
bank and bank gives loan of RM80.
• Margin requirements on the purchase of stocks
and convertible bonds and on short sales of
securities limit the amount of credit that can be
used as collateral for a loan. (Keperluan margin ke
atas pembelian saham dan bon boleh tukar dan
jualan singkat sekuriti bertujuan menghadkan
jumlah kredit yang boleh digunakan sebagai
cagaran untuk pinjaman)
.Since 1974, the U.S. margin requirement on stocks,
convertible bonds, and short sales has been 50% of
the market value of the securities.
The next slide is appendix of
BNM margin requirement