Question

During the recent monetary policy briefing, the governor of the Bank of Zambia announced the decision of the monetary policy committee (MPC). In his announcement, he stated that the MPC reduced the BoZ policy rate by 50 base points and the Statutory Reserve Ratio by 150 base points. Discuss the meaning and expected macroeconomic implications of this decision of the Monetary policy committee.

Answer 1

Policy rate is the rate at which the central bank lends money to the other banks, when the monetary policy commitee reduced the policy rate by 50 basis points it means that the repo rate/ policy rate is decreased by 0.5% of the already existing rate. Now when this policy rate is reduced it results in, banks taking more amount of loans from the central bank, this bank again sanction loans to its customers at an attractive interest rates, thus boosting investments and attracting investors, this decrese in policy rate is also called as expansionary monitory policy of the central bank, one of the important aspect of this policy is that ultimately this money passes to the people in form of wages/ incomes, resulting in increased purchasing power, which again leads to high demand resulting in higher inflation rates.

Statutory reserve ratio is the reserve requirements that a commercial scheduled bank has need to maintained in form of cash, gold reserves or government approved securities before lending to any customer, now when the Bank of Zambia decides to lower down this reserve requirement by 150 basis points, it means that the obligation of the banks to maintain there reserve is decreased by 1.5 % of the existing rate. Again this is a type of expansionary monitory policy resulting in easy loans to customers, high investments etc.