Monetary Policy in The Bahamas

Objectives of Monetary Policy

The fundamental objective of monetary policy in The Bahamas has always been to maintain stable credit and other conditions to support the fixed parity between the Bahamian and U.S. dollars that has prevailed since 1973, while simultaneously allowing the economic development objective to be pursued. Indeed, upon establishment, the Bank was given a statutory mandate to ensure that external reserves are maintained at 50% of the value of total notes and coins and demand liabilities of the Bank.

The stability objective includes maintaining the domestic as well as the external value of the currency, while the development objective requires promoting and supporting a high level of domestic production, employment and growth. In formulating its monetary policy, the Central Bank takes into consideration the prevailing and prospective domestic economic situation, fiscal operations and emerging external sector developments. In particular, credit and liquidity conditions are continuously monitored by the Central Bank.

The main instruments of monetary policy in The Bahamas are reserve requirements, changes in the Bank discount rate and selective credit controls, supplemented by moral suasion. Over the years, the Central Bank has relied extensively on interest rate controls in combination with moral suasion and other policies to manage financial sector liquidity. The Central Bank affects interest rates by varying the Bank discount rate, which is used mainly to signal changes in monetary policy. For the most part, interest rate policy reflects changing responses to bank liquidity and domestic credit conditions.

The use of market operations in the conduct of monetary policy is limited in The Bahamas - the scope of which includes the authority of the Central Bank to issue treasury bills and bonds on behalf of the Government, and which permits the Bank to buy, hold and sell stock issued to the public and maturing within 20 years from the date of acquisition. This facility though is subject to the provision that the Bank's holdings of government bonds (Registered Stock) at any point in time, does not exceed 20% of the Bank's own demand liabilities.

As recent illustrations of the Bank's conduct of monetary policy, policy-tightening initiatives were implemented in July 2001, when it became evident that the slowing US economy was exerting a drag on The Bahamas. Initially, moral suasion was used to encourage a more conservative posture in private sector lending, including more rigorous application of collateral requirements and scrutiny of credit worthiness.

Given that consumer lending played less significantly in the overall credit trends, the Bank also directed its attention more generally at overall private sector credit, and subsequently, imposed a direct freeze on the outstanding level of credit, rolled back to the first week of September 2001. Banks were allowed to grant new loans only to the extent of resources obtained from ongoing repayments, and were at liberty to determine how these resources would be allocated within their portfolios. The credit restrictions were lifted in August 2004, following the improvement in economic and monetary conditions.

The Monetary Policy Committee

The Monetary Policy Committee (MPC) was established in June 1980 by then Governor, Sir William C. Allen. Its purpose is to track and review monetary and financial trends and developments within the banking sector, with a view to defining policies to effect a stable monetary environment. The composition of the Committee is determined by the Governor, and currently includes the Deputy Governor and various department heads. The MPC has no statutory basis or authority, although its deliberations have formed the basis of all policy actions taken by the Central Bank since 1980. In this regard, decisions and policy measures originate from the Governor, relying on recommendations formulated by the Committee.

Monetary Policy