NBC keeps abreast of changing roles of central banks

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One of the key roles of central banks is to keep price increases low and stable in order to avoid sudden spikes in inflation and to maintain steady economic growth through monetary policy.

The US Federal Reserve made 2% an official target in 2012. The European Central Bank (ECB, Bank of England (BoE) and Bank of Canada (BoC) have also set targets of 2%. This is so important. for the BoE its governor must write to the Chancellor of the Exchequer (Minister of Finance) if there is a 1 percent movement in inflation up or down.

In Japan, deflation rather than inflation was the concern after decades of falling prices. From 2012, as part of the “Abenomics” plan of then Prime Minister Shinzo Abe, the Bank of Japan set a target of 2% consumer price hikes. It continued to extend the duration of the target, but the Consumer Price Index (CPI) remained stubbornly below 2%. The bank is now believed to be targeting 1% inflation in 2023 due to the effects of the coronavirus pandemic.

For the BNC, inflation targeting is made more complicated by the economy’s dependence on two currencies, the US dollar and the riel.

“In the context of a highly dollarized economy, the effective conduct of monetary policy is limited and the National Bank of Cambodia loses its ability to act as a lender of last resort,” the bank said.

The central bank promoted the riel to encourage sustainable economic growth and to wean the banking system from its dependence on the dollar. He withdrew low dollar dollar bills from circulation and demanded that transactions under $ 100 be made in his own fiat currency.

The BNC has maintained price stability by fixing the reserve requirement ratio and by carrying out foreign exchange interventions. It is also developing other monetary policy instruments to enhance its efficiency by issuing negotiable certificates of deposit and developing interbank and money markets.

The central bank has kept inflation low through its monetary policy with average annual price increases of less than 5%. Large price increases are not a concern in the short term. The IMF said last month that with non-food and energy inflation moderating, the overall consumer price index is expected to stay around 3%.

As the coronavirus pandemic continues, the BNC has maintained a loose monetary policy to complement the work of the Ministry of Finance and the Economy to help struggling businesses and spur recovery.

The government’s fiscal arsenal to combat the effects of Covid-19 included $ 60 million to test, contain and treat the virus, more than $ 760 million in social assistance for the poorest households and work programs and $ 123 million in wage subsidies and training for hanging garments and worker tourism. It also gave subsidies and tax breaks to these two struggling industries.

For its part, the BNC took four measures to improve liquidity: it delayed the increase in the Capital Conservation Buffer (which would have forced banks to set aside more capital to cover potential losses); it reduced the interest rates of liquidity guarantee operations (by which the BNC gives or takes liquidity in riel from banks), thus reducing the financing costs of banks in riel; it reduced the interest rate on negotiable certificates of deposit (a short-term interest-bearing debt issued by the BNC); he lowered the reserve requirements in dollars and riel for banks and financial institutions to 7%.

The central bank has also issued directives to banks and microfinance institutions, allowing them to restructure loans taken out by companies in the ailing tourism and clothing sectors.

Manufacturing, construction, transport and logistics. The program runs until December 31 of this year.

Moody’s Analytics economists praised central banks in the Asia-Pacific region for the speed with which they responded to the crisis and the support they provided during the height of the pandemic.

“These stocks, including those of NBC, were key to putting a floor under significant declines in domestic demand,” said Katrina Ell and Dave Chia of Moody’s. They warned that monetary policy does not work alone to support the economy.

“Fiscal policy must continue to play a critical role in providing targeted support to vulnerable households and SMEs [small and medium enterprises], as well as ongoing measures to improve the quality of health and education with a primary objective of improving social protection. This is particularly true for Cambodia where SMEs play an important role and a large part of the population is unbanked, ”they said.

The Asian Development Bank (AfDB) country director said Cambodia’s central bank has adapted well to its regional counterparts in terms of dealing with the negative impact of the coronavirus pandemic.

“Although the exact mix of policy measures varies by country, there are great similarities in the policy changes that central banks in Southeast Asia have introduced in response to Covid-19,” Sunniya Durrani said. Jamal, AfDB Country Director for the Cambodian Resident. Mission.

“The high level of dollarization observed in Cambodia restricts the monetary policy space of the NBC relative to most other central banks in the region. However, despite this constraint, NBC acted quickly at the onset of the pandemic and provided a very effective political response.

Key elements of the BNC’s policy package have all figured in the policy responses of other Southeast Asian central banks. For example, the Indonesian, Malaysian, Laotian and Filipino authorities have all reduced reserve requirements for deposits. Most other countries have also cut their key rates, and many have put in place loan restructuring programs.

Overall, NBC’s response has been timely and has helped mitigate the effects of the pandemic. NBC has also done a good job in maintaining clear communication with the banks and microfinance institutions it regulates and in explaining key policy changes to the general public, Durrani-Jamal said.

The BNC continues to monitor the financial sector and research risks. It has partnered with the AfDB to create an online database, the Macroeconomic Surveillance Database System, to monitor Cambodia’s financial situation. The database will enable AfDB and BNC to develop policies aimed at ensuring price stability and supporting economic growth.

The database includes information compiled monthly, quarterly and annually, divided into six main macroeconomic sectors: global economic change, macroeconomic stability, data from abroad, fiscal sector, financial sector and a comparison of data with countries with a situation economic similar to that of Cambodia. .

The bank’s policies appear to have paid off during the pandemic. Central Bank Governor Cheo Chanto told IMF Senior Economist Alasdair Scott last month that the Kingdom has avoided inflationary pressures and is benefiting from a stable exchange rate with volatility below 2% . He said there were enough foreign reserves to guarantee the export of goods and services for 10 months.

The assets of the banking system increased by more than 17% in the first half to reach nearly 54.4 billion dollars compared to the previous year. Deposits grew nearly 20% to over $ 32 billion during the same period.


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