Under the Central Banking Act 2000 (as amended), the Bank is required to focus on price stability as its primary objective of monetary policy whilst promoting employment and economic growth as its secondary objective. Maintaining price stability in a small open economy like PNG requires, amongst other things, relative stability in the exchange rate, interest rates and inflation.
Consistent with this objective, the analysis of price changes became central to the assessment of macroeconomic conditions and the conduct of monetary policy. The Bank closely monitors and reports on “underlying or core inflation”, based on inflation outcomes released quarterly by the National Statistical Office and monthly data collected from the Bank’s Retail Price Index.
Underlying/core inflation measures the inflationary pressures in the economy that are predominantly due to market forces, i.e. changes in prices that reflect the long-run supply and demand conditions in the economy. This distinction is crucial so that any assessment on the appropriate stance of monetary policy has to exclude the effects of temporary shocks caused by highly volatile, seasonal or policy factors.
The Central Banking Act requires the Bank to produce semi-annual statements, which spell out the Bank’s stance and conduct of monetary policy over the coming six months. The first statement was released on 17 July 2000, one month after the Act came into effect.
The formulation of monetary policy has been broadly guided by analysis of the main factors that influence price movements and their economic consequences. In designing monetary policy, the Bank considers actual and projected developments in the international economy, domestic economic conditions, the balance of payments, and fiscal operations of the Government and their potential impact on monetary aggregates, the exchange rate and inflation. Projections may also incorporate the requirements of the IMF financial program from 2023 to 2026, which include the implementation of the exchange rate reform and clearing of FX outstanding orders, and implementation of monetary policy reforms to improve the transmission of monetary policy.
The Bank continues to assess market developments and the main macroeconomic indicators that would impact materially on future inflation performance, and to determine whether monetary policy was on track or whether any changes were warranted. The key indicators include movements in exchange rate, maintenance of positive real interest rate, money and credit aggregates, prudent implementation of the National Budget, draw-down of budgeted external extra-ordinary financing and retirement of domestic debt by Government. The Bank always ensures that any changes to its policy stance are implemented gradually and are consistent with developments in these key areas and their impact on the rate of inflation.