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Tools and Strategy by Bnm in Executing Monetary Policy

Autor:   •  April 30, 2015  •  Coursework  •  607 Words (3 Pages)  •  534 Views

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Tools and Strategy Used by

Bank Negara Malaysia

In Executing Money Policy

MONEY AND BANKING

ECON 3410

Section 4

MUHAMMAD FAIZ BIN ABDULLAH 113443

AHMAD AMMAR BIN MOHD ASRI   1215117

YOUSSOUF HACHIM OBE          834579

Introduction

Objectives of bank Negara Malaysia which are first to promote monetary stability and a sound financial structure, Secondly to act as a banker and financial adviser to the government. Thirdly to issue currency and keep reserves safeguarding the value of the currency. Then, to influence the credit situation to the advantage of the country.  Bank Negara Malaysia conducts its monetary policy by influencing the level of interest rates that borrowers have to pay on their loans and that depositors earn on their deposits. When the economy is overheating and the threat of inflation is high, monetary policy will be tightened by withdrawing funds from the banking system and raising interest rates. The higher interest rates will encourage people to save more and spend less. It would also make it more expensive for people to borrow money. This will cause consumption and investment to decrease to a level that is more sustainable and reduce the inflation. Equally, when economic conditions are weak, funds will be injected into the banking system to reduce interest rates. With lower interest rates, spending and borrowing would increase. The resulting increase in consumption and investment would encourage advance economic activity, leading to higher income, employment and economic growth. Bank Negara Malaysia has a number of monetary instruments at its disposal to inject and withdraw funds to influence the level of interest rates in the financial system. It including open market operation, reserve requirement, and inflation targeting which will be discuss in this assignment.

Open Market Operation

Reserve Requirement

The Statutory Reserve Requirement (SRR) is a monetary policy instrument available to Bank Negara Malaysia (BNM) to manage liquidity and hence credit creation in the banking system. It is used to withdraw or inject liquidity when the excess or lack of liquidity in the banking system is perceived by BNM to be large and long-term in nature. This requirement applies to commercial banks, merchant/investment banks licensed under the Banking and Financial Institutions Act 1989 and Islamic banks licensed under section 3(4) of the Islamic Banking Act 1983.

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