| Monetary
policy refers to the actions undertaken by a central bank
to influence the availability of money and credit to help
promote national economic objectives of growth, employment
and stable prices. Under the terms of the Eastern Caribbean
Central Bank Agreement Act 1983, the Monetary Council
has responsibility to provide directives and guidelines
on matters of monetary and credit policy to the Bank (Article
7.2). The Monetary Council, which is comprised of one
minister from each of the eight participating governments,
meets three times a year to receive the Governor’s
report on monetary and credit conditions and to give directives
and guidelines on policy. The framework for the conduct
of monetary policy is set out in Section 4 of the Agreement,
which lists the core purposes of the Bank as follows:
- to regulate the availability of money and credit;
- to promote and maintain monetary stability;
- to promote credit and exchange conditions and a
sound financial structure conducive to the balanced
growth and development of the economies of the territories
of the Participating Governments; and
- to actively promote through means consistent with
its other objectives the economic development of the
territories of the Participating Governments.
The mandate to promote and maintain monetary stability
is interpreted to mean that the Bank must safeguard
the value of the currency, in terms of what it will
purchase at home and in exchange for other currencies.
Typically, central banks pursue this core purpose through
the conduct of monetary policy aimed at maintaining
price stability. Given the small size and openness of
the economies of the member countries, the Bank has
sought to pursue the objective of price stability through
the maintenance of a fixed exchange rate link with the
US dollar.
Price stability is seen as a precondition for achieving
the wider economic goal of sustainable growth and high
employment. High inflation can be damaging to the functioning
of the economy, while low inflation – price stability
– fosters sustainable long-term economic growth.
The fixed exchange rate peg at EC$2.70 to US$1.00, which
has been in effect since July 1976, has served the currency
union relatively well. It has delivered low inflation,
a credible currency and a stable environment for growth
and investment.
The Bank’s ability to execute its responsibility
“to regulate the availability of money and credit”
is constrained by the underdeveloped nature of the financial
markets. This inhibits the ability of the Central Bank
to influence the level of interest rates and thereby
the availability of money and credit through market
means. In principle, interest rates in the currency
union are set at the discretion of the commercial banks,
except that the Bank regulates the minimum rate payable
on savings deposits.
In order to promote the economic development of the
countries, facilitate credit and exchange conditions
and enhance the capacity to conduct monetary policy,
the Bank has sought to develop the money and capital
markets. In this regard, the Bank has promoted and encouraged
the development of an inter-bank market, a regional
market for the primary issuance and secondary trading
in government securities, and a regional securities
exchange. These markets have begun to impact and improve
the efficiency with which interest rates are determined
in the currency union.
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Monetary Policy Framework