Central banking and monetary policy Essay Sample
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Central banking and monetary policy Essay Sample
Central banks were first established in the 17th century, with the primary purpose of providing war finance to governments and managing their debts.
Their role in the economy has since evolved in a very different direction. Central banks perform several tasks such as; providing settlement services to large-value payments, oversee banks for the sake of financial stability, act as lenders-of-last-resort and implement monetary policy. These tasks and their mode of operations have been repeatedly redefined in order to resolve specific monetary and financial crises.
Central banking is nowadays primarily an agency for monetary policy. It usually also has important financial stability functions, and those become more prominent during times of financial turmoil.
1.2 Objective of research
The rise of China has resulted into unique ways a financial system can grow to solve financial and monetary challenges across developing countries. This paper tries to illustrate the following points
The difference between the People’s Bank of China and the Bank of Uganda in terms of history, organizational structure, monetary policy and operations
1.3 Research contribution
The use of empirical analysis of information collected from authorized websites such as the Bank of Uganda and Peoples Bank of China, the paper attempts to bridge a gap between the structure and setup of the two central banks and how they function.
2. LITERATURE REVIEW
The People’s Bank of China (PBC) was built up on 1st December, 1948, from the merger of three banks – the Bank of Northern China, the Bank of North Sea, and the Northwest Peasant Bank. It was located originally in Shijiazhuang, Hebei province and then moved to Beijing after the liberation of China in October, 1949. In order to cater to the name of socialism the PBC was established and it was the only state-owned bank at that time.
During the period of 1949 to 1979, the PBC practiced the dual functions as central bank and general banking. It was not until 17th September, 1983, did the PBC relieve its duties of commercial and saving banking functions, and was ordered to perform exclusively the functions of a national central bank. And the original deposit and lending transactions was transferred to the Industrial and Commercial Bank of China (ICBC) which was established for this specific purpose.
With the “Law of the PBC” passed in 1995, the PBC began to take responsibility of implementing monetary policy and banking supervision. According to the “Law of the PBC”, it is to “independently implement monetary policies under the leadership of the State Council”. Although the PBC has independence of implement monetary policy, the PBC operates under the leadership of the State Council and needs to seek approval of the State Council prior to implementation. In December 1998 the financial system reform created a new organizational structure of the PBC, in which 9 trans-province branches were established in corresponding economic region plus 20 financial supervisory offices located in the major cities.
In 1966, the Bank of Uganda (BoU), which controlled the issue of currency and managed foreign exchange reserves, became the central bank and national banking regulator.
From its Establishment on 1st July 1966, it became fully operational on 15th August 1966, under the Bank of Uganda Act I966; amended by the Bank of Uganda Act (Cap.51) Laws of Uganda 2000.
Under article 161 of the Constitution of the Republic of Uganda 1995, the Bank of Uganda shall be the central bank of Uganda and is mandated under Article 162 (I) of the Constitution to promote and maintain the stability of the value of the currency of Uganda; to regulate the currency system in the interest of the economic progress of Uganda and to encourage and promote economic development and the efficient utilization of the resources of Uganda through effective and efficient operation of a banking and credit system. The bank’s mission is to foster price stability and a sound financial system.
2.2 Organizational structure
The top management of the PBC is currently composed of one governor, seven deputy governors and three assistant governors. The candidacy of governor is nominated by the Premier of the State Council and approved by the National People’s Congress (NPC), his appointment and removal from office is decided by the president of the country. As to deputy governors, their appointments and removals are subjected to the powers of the Premier of the State Council. For both the governor and deputy governors, no terms of service is available.
The authority of the Bank of Uganda shall vests in a Board which consists of the Governor, a Deputy Governor and not more than five other members.The Governor and Deputy Governor are appointed by the President with the approval of Parliament. They serve a five year term and are eligible for re- appointment. The office of Governor and Deputy Governor shall each be a public office and the Governor and Deputy Governor shall respectively be Chairperson and Deputy Chairperson of the Board of Directors. A Board Secretary, who is an employee of the Bank, is appointed by the Board to facilitate the Board business.
2.3 Monetary policy
The Chinese Monetary Policy Committee (MPC) plays a consultative role for the monetary policy making and adjustment. It includes four members of the PBC (the governor, two deputy governors, the administrator of the State Administration of Foreign Exchange), eight members of the government (a deputy secretary of State Council, a vice minister of State Development and Reform Commission, a vice minister of Ministry of Finance, a director of National Statistic Bureau, the chairman of China Banking Regulatory Commission (CBRC), the chairman of China Securities Regulatory Commission (CSRC), the chairman of China Insurance Regulatory Commission (CIRC), the finance institute director of the Development Research Center of the State Council), and three represents from state owned enterprises and academic area. The MPC meets quarterly and its meeting opinions are attached as annex to policy decisions.
The Ugandan Monetary and Credit Policy Committee [MCPC], which meets weekly, make monetary policy decisions. The members are the Governor, the Deputy Governor, Executive Directors and Director Research as Secretary. The Heads of Financial Markets, Commercial Banking, Non-Banking, PR/Communications, Trade and External Debt and Legal attend by invitation but participate in deliberations. The MCPC decisions are implemented by the Financial Markets Operations sub-committee [FMOS], which meets daily.
2.4 Monetary policy objectives
Through Reform, the monetary policy operations in China have experienced change from direct controlling to indirect money market controlling. Presently the liberalization of interest rate is yet not thorough. Wholesale transactions are now fully liberalized, and the ceilings of lending rates and the floors of deposit rates are removed in retail transactions, but a ceiling of deposit rates and a floor of lending rates is still retained in retail transactions. The reason for such a special mechanism of interest rates framework is to protect banks’ intermediation margins (Cao Tinggui, 2001). Some financial innovations have paved the way to the provision of market-based funds to corporations without subject to the control of banks’ interest rates (Conway, 2010). First, the commercial paper (CP) has provided the large corporations with access to funding. Although CP is subject to the PBC guidance in the primary market, its trading rates are free in secondary market. Hence, it brings to more flexibility when price short-term financing through the CP market than at the banks’ loan market. For this reason, the CP market expands rapidly comparing to the market of loans, with a year-on-year increase of 51 percent in CP balance in contrast to 14 percent for banks’ loan. Second, banks’ discount operations is beyond the interest rates controls on banks’ lending operations, so that banks can make loans to the customers at the rate below the statutory line. Finally, the liberalization of the foreign exchange swap market in July 2005 combined with a free current account has built a way for circumventing the control of interest rate.
As of July 2011, the Bank of Uganda reformed its monetary policy framework to meet the challenges of macroeconomic management generated by the transformation of the economy over the last 10 years, and in particular the rapid growth and diversification of the financial system. These reforms entail the transition to an inflation targeting-lite monetary policy framework.
The primary policy objective of monetary policy remains unchanged: the control of core inflation over a medium term horizon. The reforms to the monetary policy framework are intended to strengthen implementation of Uganda’s medium term macroeconomic framework.
From the empirical evidence collected, we observe notable differences within the history of the two central banks that partially determine the direction each country has taken to reach the state at which they are currently.
The Peoples Bank of China, which started operations earlier thank the Bank of Uganda and made radical adjustments from its beginning resulting from a merger of 3 banks to performing dual functions as central bank and general banking conducting to finally operating partially independently of the State government while still acquiring state council approval of monetary policy implementation.
The Peoples Bank of China, while larger in size, has a more representative panel of experts on its monetary policy committee such as government members, members of state owned enterprises and academia that complement its role of its monetary policy objectives which is to maintain the stability of the value of the currency and thereby promote economic growth.
From the Bank of Uganda’s smaller size, it is able to have monetary policy committee meetings more often than its Chinese counterpart and operates a more free market approach as to how its interest rates are determined in comparison to the much larger People’s Bank of China.
However we note that although both countries employed reforms towards their financial systems, China’s financial system which moved from direct controlling to indirect money market controlling has created more innovations for co-operations which have resulted into a more rapid advancement to development of their financial system.
The People’s Bank of China and its Monetary Policy, Prof. Cao Tinggui, working paper.
Paul Conway, Richard Herd, Thomas C. (2010). Reforming China’s Monetary Policy
Framework to Meet Domestic Objectives. OECD Economics Department Working Papers, http://dx.doi.org/10.1787/5km32vmsq6f2-en.
Carl E. Walsh (2005). Central Bank Independence. University of California, Santa Cruz,
2005-12.The Peoples Bank of China Website http://www.pbc.gov.cn/english/130437/index.htmlThe Bank Of Uganda Website https://bou.or.ug/