The Overnight Policy Rate (OPR) The Overnight Policy Rate (OPR) is the interest rate that commercial banks charge for lending excess reserve to another commercial bank. Central Bank of Malaysia (BNM) determines the OPR. According to the article Monetary Policy Meeting (n.d.), “The reason why Malaysia uses OPR as one of its monetary policy is because OPR triggers a chain of many events such as: the Base Lending Rate (BLR), short-term interest rates, fixed deposit rate, foreign exchange rates, long term interest rates, the amount of money and credit and ultimately a range of economic variables, including unemployment, output, price levels and inflation which are the micro and macro factors on the economics of Malaysia.” The other three tools are Discount Rate, Reserve Requirements (R.R) and Open Market Operations (OMO). By using the three other tools, the BNM influences the demand for, supply of, balances that depository institutions hold at BNM and in this way it alters the OPR. Giving an example, if the discount rate is lowered, it reduces the cost of borrowing of consumers from commercial banks and this encourages commercial banks to borrow reserves from the BNM. With that being said, OPR decreases and thus it increases the money supply in the economy. This applies when unemployment rates are high and when a country is facing recession. On the other hand, if BNM were to increase the discount rates then thus it increases the cost of borrowing of consumers from commercial banks and there will be less demand of excess reserves because the OPR will increase. This applies when the country is facing inflation. The following graph shows the relation between BLR and OPR. Graph of OPR and BLR Retrieved from: http://www.bebas-hutang... ... middle of paper ... ...towards neutralizing the monetary conditions and preventing the risk of financial imbalances that could destabilize the economy recovery process. At the new level of the OPR, the standpoint of monetary policy continues to remain supportive to the economic growth. In conclusion, BNM raise OPR in order to overcome inflation and in opposed to recession, BNM reduces the OPR. Works Cited Financial Glossary: Monetary Policy Meeting. (n.d.). Retrieved March 30, 2011, from http://www.realestateagent.com.my/Financial%20Glossary/Monetary%20Po licy%20Meeting.htm. OPR Decisions & Statements: Monetary Policy Statements. (2008). Retrieved April 3, 2011, from http://www.bnm.gov.my/microsites/monetary/0401_20081124.htm. OPR Decisions & Statements: Monetary Policy Statements. (2010). Retrieved April 3, 2011, from http://www.bnm.gov.my/microsites/monetary/0401_20100304.htm
The Federal Reserve uses three main tools in order to control the money supply. The first tool is open-market operations. These operations consist of the buying and selling of government bonds to commercial banks and the public. Open-market operations are the most important tool that the Fed can use to influence the money supply (Brue, 2004, p. 252). By buying bonds from the open market, the Federal Reserve increases the reserves of commercial banks which in turn will increase the overall money supply in the country. The opposite is true if the Fed sells bonds on the open market. By doing so, the Fed reduces the reserves of banks and, in turn, takes money out of the system. By being able to control how much money the commercial banks can lend, the Fed has a very powerful tool to adjust the economy.
Open market operations directly affect the money supply through buying short-term government bonds (to expand money supply) or selling them (to contract it). Benchmark interest rates, such as the LIBOR and the Fed funds rate, affect the demand for money by raising or lowering the cost to borrow—in essence, money's price. When borrowing is cheap, firms will take on more debt to invest in hiring and expansion; consumers will make larger, long-term purchases with cheap credit; and savers will have more incentive to invest their money in stocks or other assets, rather than earn very little—and perhaps lose money in real terms—through savings accounts. Policy makers also manage risk in the banking system by mandating the reserves that banks must keep on hand. Higher reserve requirements put a damper on lending and rein in inflation.
In normal times, the monetary authority (usually a central bank or finance ministry) can stimulate the economy by lowering interest rate targets or increasing the monetary base. Either action should increase borrowing and lending, consumption, and fixed investment. When the relevant interest rate is already at or near zero, the monetary authority cannot lower it to stimulate the economy. The monetary authority can increase the overall quantity of money available to the economy, but traditional monetary policy tools do not inject new money directly into the economy. Rather, the new liquidity created must be injected into the real economy by way of financial intermediaries such as banks. In a liquidity trap environment, banks are unwilling to lend, so the central bank's newly-created liquidity is trapped behind unwilling lenders.
The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations. Using the three tools, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.
In 2007, the financial crisis broke out and damaged many countries’ economies across the globe. Central banks around the world took actions to react with a series of monetary policy. Many central banks like European central bank(ECB), Federal Reserve (FED) lowered their interest rate to around zero in 2009. Because of the constraint of Zero Lower Bound(ZLB), the conventional monetary policy(CMP) is no longer efficient. Therefore, the conventional monetary policy instrument that focus on a short run interest rate converting into concentrate on the adjustment of central’s balance sheet, which is the unconventional monetary policy(UMP). ECB and FED have implemented unconventional policy such as purchasing the government debts and lowering the requirement of loan collateral.
In recent years, monetary policy has become the prime tool of government macro-economic policies with a particular emphasis on interest rates as the main control variable within monetary policy. The prominence of interest rates means that monetary policy can affect the aggregate demand. For example, at higher interest rate levels, firms invest less and households spend less due to the increase in the cost of borrowing. Therefore, households and firms are less willing to borrow money for investing or consuming purposes. The rising interest rates also can have an affect on the international world. For instance, if the United Kingdom has relatively high interest rates in comparison to the rest of the world, it will cause the exchange rates to escalate. If the exchange rates rise due to the increase in interest rates, it will dramatically affect the United Kingdom’s competitiveness in the world market. The changes of interest rates and their effects can be explained by the transmission mechanism of monetary policy.
In an economy recently plagued with housing market crashes and financial crisis, we can easily see the vital functions that a monetary policy has on anticipating and preventing instability in our economy. Understanding how monetary policy works and how it’s affected by either rules or discretion is crucial, and all aspects must be taken into account to establish the most effective choice for our economy.
When an economy is in a recession the government has to act differently in order to increase demand and help businesses survive. The money supply method of the monetary policy is a good idea in theory but because of the current economic crisis, banks don’t feel secure enough to lend out there money as the return isn’t guaranteed.
Its main focus is on monetary and other financial markets, determination of interest rates, extent to which monetary policy influences the behavior of the economic units and the implication such influence have in the context of macroeconomics. Hence, monetary policy could be defined as an economics of money supply, prices and interest rate, and their consequences in the economy. It therefore focuses on monetary and other financial markets, determination of interest rate, extent to which these policies, influences the behavior of economic units and the implications the influence has in the macroeconomic context. (Jagdish,
The Federal Reserve system can use either an expansionary or contractionary policy in their efforts to keep the macroeconomy as stable as possible. The four tools used to help with these efforts are: “open market operations, changes in the reserve ratio, changes in the interest rates paid on reserves, and discount rate changes” (352).
The monetary Environment comprises of the activities of a national bank, cash board or other administrative council that decide the size and rate of development of the cash supply, which thusly influences loan fees. Fiscal approach is kept up through activities, for example, altering the loan cost, purchasing or offering government securities, and changing the measure of cash banks are required to keep in the vault (bank holds). The Federal Reserve is responsible for the United States' money related arrangement.
The first major aspect of the monetary policy by the Federal Reserve is its interest rate policy. This interest rate policy is mainly determined by the figure for the federal funds rate, which is the rate at which commercial banks with balances held within the Federal Reserve can borrow from each other overnight in ord...
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
There are several factors affecting the money supply: spread between the discount rate and federal funds rate, required reserve ratio and open market operations. It is very important to understand that whenever the "DR charged by Fed is lower than the FFR charge by other banks; banks tend to borrow from the Fed.
Interest rates and the effects of interest rates on the economy concern not only macroeconomists but consumers, savers, borrowers, and lenders. A country may react and change their interest rates, according to the prosperity of their economy. Interest rates, is the percentage usually on an annual basis that is paid by the borrower to the lender for a loan of money (Merriam-Webster). If banks decided not to use interest rates, it would be impossible for others to be able to take out loans and therefore, there would be far less spending money in the economy. With interest rates, this allows banks to take a percentage of the consumer’s money and loan it out to others, thus allowing economic growth to be possible. Interest rates also allow lenders to have a “safety net” which is necessary because there is a possibility that the borrower would be unable to pay back a loan to the bank. A nation’s interest rates can be raised or lowered and these shifts in interest rates correlate directly to aggregate demand. Aggregate demand, is the total demand for final goods and services in an economy at a given time (Business Dictionary). A nation uses interest rates for economic growth or to help prevent inflation. When economic growth is needed a nation would lower their interest rates. However, if a country is concerned about inflation, they may choose to raise their interest rates. When interest rates, raised or lowered, will have a negative or positive impact on consumers, and have a positive or negative impact on investors.