The objective of monetary policy as stipulated in Section 7 of the Central Banking Act 2000 (as amended) is to achieve and maintain price stability as the primary objective; and, to the extent not inconsistent with this and as secondary objectives, to ensure financial stability, promote sustainable medium term economic growth, especially in the non-mineral and non-petroleum sector, and to promote the development of the financial sector of Papua New Guinea’s financial system.
In the short run, the emphasis on price stability seeks to mitigate excessive fluctuations in interest rates, exchange rates and consumer price index inflation, thereby fostering a conducive environment for economic growth and employment. In the medium term, the Bank of Papua New Guinea aims to achieve low and stable inflation, while striking a balance that supports sustainable economic growth, with a particular focus on bolstering the export sector to ensure the convertibility of the kina.
Under the Central Banking Act, monetary policy is the responsibility of the Bank of Papua New Guinea. It is formulated through advice from the Bank's staff to the Monetary Policy Committee, which comprises of the Governor of the Bank, the Deputy Governor, and three external appointees, of which at least one must be a non-resident monetary policy expert.
The Bank's Monetary and Economic Policy Group is responsible for the design and formulation of monetary policy, while the policy is implemented through the financial markets using instruments such as the Kina Facility Rate (KFR).
The Monetary and Economic Policy Group is headed by an Assistant Governor and has two departments, Economics and Research.
Formulation of Monetary Policy
The Bank releases two Monetary Policy Statements (MPS) each year, as required under the Central Banking Act. The first is released on 31st March and the second on 30th September.
Expected developments in the global economy and their implications for the domestic economy, through the balance of payments, fiscal operations of the Government, monetary aggregates, real sector (economic activity), exchange rate and ultimately the impact of these variables on inflation are considered in the formulation of monetary policy.
On a monthly basis the Bank considers developments in the same areas for the setting of the policy signaling rate, the Kina Facility Rate (KFR). Analysis of the quarterly Consumer Price Index (CPI), released by the National Statistical Office, and the Bank’s own Retail Price index are key inputs for the determination for the KFR.
The Bank’s estimates and projections of gross domestic product, balance of payments, and inflation are discussed in consultative meetings with the Treasury department for the latter’s formulation of fiscal policy, especially the Government’s National Budget.
Implementation of Monetary Policy
Monetary policy is managed within a reserve money framework. Reserve money comprises currency in circulation and deposits of commercial banks with the Bank of PNG. The Monetary Policy Statement provides the overall monetary policy stance, while the monthly KFR signals this stance or any changes through an announcement by the Governor.
Following the KFR announcement, open market operations are conducted to implement the stance. This involves buying and selling Government securities, including auctions of Central Bank Bills (CBBs), Treasury Bills (T-Bills) and inscribed stock on the open market, and Repurchase Agreements (Repo) transactions between commercial banks and the Bank of PNG. These operations are intended to affect the debt market, influence borrowing rates and stimulate economic growth.
The Bank also uses its direct policy instrument, the Cash Reserve Requirement (CRR), for liquidity management.