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Monday, August 2, 2021

Country focus: The Gambia Re: the financial, economic and other ramifications of printing new currency and minting new coins

Momodou Camara (Acca)

The timing and introduction of the new banknotes and minting of coins-(if any) is bad and ill conceived.

From our financial news terminal here at Money and Markets @ Standard Newspaper, we have been looking at the latest move by the Central Bank of The Gambia.

Central banks, their functions and role
policy instruments
The main monetary policy instruments available to central banks are open market operation, bank reserve requirement, interest rate policy, re-lending and re-discount (including using the term repurchase market), and credit policy (often coordinated with trade policy).

While capital adequacy is important, it is defined and regulated by the Bank for International Settlements, and central banks in practice generally do not apply stricter rules.

Interest Rates
By far the most visible and obvious power of many modern central banks is to influence market interest rates; contrary to popular belief, they rarely “set” rates to a fixed number. Although the mechanism differs from country to country, most use a similar mechanism based on a central bank’s ability to create as much fiat money as required.

The mechanism to move the market towards a ‘target rate’ (whichever specific rate is used) is generally to lend money or borrow money in theoretically unlimited quantities, until the targeted market rate is sufficiently close to the target.

Central banks may do so by lending money to and borrowing money from (taking deposits from) a limited number of qualified banks, or by purchasing and selling bonds.

As an example of how this functions, the Bank of Canada sets a target overnight rate, and a band of plus or minus 0.25%.

Qualified banks borrow from each other within this band, but never above or below, because the central bank will always lend to them at the top of the band, and take deposits at the bottom of the band; in principle, the capacity to borrow and lend at the extremes of the band are unlimited.[9] Other central banks use similar mechanisms.

The target rates are generally short-term rates. The actual rate that borrowers and lenders receive on the market will depend on (perceived) credit risk, maturity and other factors.

For example, a central bank might set a target rate for overnight lending of 4.5%, but rates for (equivalent risk) five-year bonds might be 5%, 4.75%, or, in cases of inverted yield curves, even below the short-term rate.

Many central banks have one primary “headline” rate that is quoted as the “central bank rate”.

In practice, they will have other tools and rates that are used, but only one that is rigorously targeted and enforced.

“The rate at which the central bank lends money can indeed be chosen at will by the central bank; this is the rate that makes the financial headlines.”

[10] Henry C.K. Liu explains further that “the U.S. central-bank lending rate is known as the Fed funds rate. The Fed sets a target for the Fed funds rate, which its Open Market Committee tries to match by lending or borrowing in the money market … a fiat money system set by command of the central bank.

The Fed is the head of the central-bank because the U.S.

dollar is the key reserve currency for international trade. The global money market is a USA dollar market.

All other currencies markets revolve around the U.S. dollar market.”

Accordingly, the U.S. situation is not typical of central banks in general. Typically a central bank controls certain types of short-term interest rates.

These influence the stock- and bond markets as well as mortgage and other interest rates.

The European Central Bank for example announces its interest rate at the meeting of its Governing Council; in the case of the U.S. Federal Reserve, the Federal Reserve Board of Governors. Both the Federal Reserve and the ECB are composed of one or more central bodies that are responsible for the main decisions about interest rates and the size and type of open market operations, and several branches to execute its policies.

In the case of the Federal Reserve, they are the local Federal Reserve Banks; for the ECB they are the national central banks. A typical central bank has several interest rates or monetary policy tools it can set to influence markets.

Marginal lending rate – a fixed rate for institutions to borrow money from the central bank. (In the USA this is called the discount rate).

Main refinancing rate – the publicly visible interest rate the central bank announces. It is also known as minimum bid rate and serves as a bidding floor for refinancing loans.

(In the USA this is called the federal funds rate).

Deposit rate, generally consisting of interest on reserves and sometimes also interest on excess reserves – the rates parties receive for deposits at the central bank.

These rates directly affect the rates in the money market, the market for short term loans.

Some central banks (e.g. in Denmark, Sweden and the Eurozone) are currently applying negative interest rates.

Open market operations
Through open market operations, a central bank influences the money supply in an economy.

Each time it buys securities (such as a government bond or Treasury bill), it in effect creates money.

The central bank exchanges money for the security, increasing the money supply while lowering the supply of the specific security.

Conversely, selling of securities by the central bank reduces the money supply.

Open market operations usually take the form of: Buying or selling securities (“direct operations”) to achieve an interest rate target in the interbank market.

Temporary lending of money for collateral securities (“Reverse Operations” or “repurchase operations”, otherwise known as the “repo” market).

These operations are carried out on a regular basis, where fixed maturity loans (of one week and one month for the ECB) are auctioned off.

Foreign exchange operations such as foreign exchange swaps. All of these interventions can also influence the foreign exchange market and thus the exchange rate. For example, the People’s Bank of China and the Bank of Japan have on occasion bought several hundred billions of U.S. Treasuries, presumably in order to stop the decline of the U.S. dollar versus the renminbi and the yen.

Quantitative easing (QE)
When faced with the zero lower bound or a liquidity trap, central banks can resort to quantitative easing (QE).

Like open market operations, QE consists in the purchase of financial assets by the central bank. There are however certain differences: The scale of QE is much larger.

The central bank implementing QE usually announces a specific amount of assets it intends to purchase.

The duration of QE is purposefully long if not open-ended.

The asset eligibility is usually wider and more flexible under QE, allowing the central bank to purchase bonds with longer maturity and higher risk profile.

In that sense, quantitative easing can be considered as an extension of open market operations. Stick with me and with The Standard for part seven (7)


*** No significant changes since June in the indicates rates and they remain as quoted figures as per the 11th. June, 2019.

*** No significant changes since June in the market prices and they remained the same as per the 11th. June, 2019

1. I’d like to live as a poor man with lots of money.
By–Pablo Picasso
2. Fortune sides with him who dares.
3. Wealth is like sea-water; the more we drink, the thirstier we become; and the same is true of fame.
By–Arthur Schopenhauer
4. If we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed.
By–Edmund Burke
5. No wealth can ever make a bad man at peace with himself.
6. My formula for success is rise early, work late and strike oil.
By–JP Getty
7. The best thing money can buy is financial freedom.

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