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Financial Markets is the Department that
carries out the Bank's transactions with the financial markets both in
Samoa and overseas. It is the Department that actually implements
monetary policy.
In the domestic market, the
Department recommends to the Governor the volumes of Central bank bills
that should be issued in the regular tenders, and the amounts that the
Bank should trade each day in the second market.
When the Bank issues or sells securities,
it removes funds from the financial system, tending to push up interest
rates. Buying securities, or redeeming maturing securities without
replacing them, has the opposite effect. Many things can affect the
volume of funds in the system on an given day. Foreign exchange
transactions, the need for currency, Government transactions can all
have an impact.
Unless there is a need to change policy,
the Department will be working to keep the level of available funds
roughly constant. That is, it will try to offset the impact of the other
transctions by buying or selling securities. In this way interest rates
will be stable and no change in policy occurs.
Of course, if a decision is taken to
adjust the setting of policy, the Department will attempt to add to or
offset the effects of the other transactions to reduce or increase the
availability of funds. In this way it will put the descisions into
effect by forcing interest rates up or down.
To do this work the Department naturally
needs to work out whether the level of funds available to financial
system is too high, too low or just right, and whether it will rise or
fall in the near future. An important part of the Department's work,
therefore, is to forecast the transactions that will have an impact on
the level of funds in the system.
In the International markets, the
Department has three roles.
In the first of these, each morning the
Department calculates the rate of exchange for the Samoa Tala against
the United States Dollar. In general, the exchange rate is held fixed
against the average value of the currencies of Australia, the European
Union, Fiji, Japan, New Zealand and the USA, although some adjustment is
made for the difference in the rates of price inflation.
As the values of these currencies vary
every day against each other, the average must be recaculated each
morning to reflect the changes.
From this new average the Department
calculates the new rate for the Tala against the US Dollar. Rates
against other currencies are worked out by reference to their own dollar
exchange rate.
The Central Bank has promised to buy from
or sell to the commercial banks US Dollars each day at the rate
calculated in the morning. The second international role of the
Department is to undertake these transactions if the banks ask them.
If the Bank has decided that a change in
the exchange rate is necessary, the Financial Markets Department will
calculate an adjusted average exchange rate to reflect the required
change. Then it will re-work the actual rates for each currency, based
on the average. Its trading in US Dollars will then take place at the
new rate for the currency.
The final role for the Department is the
investment of the Bank's foreign currency holdings. These are invested
in top quality assets in a number of different currencies. The intention
is to obtain a resonable rate of return without undue risk while
ensuring that the country's need for foreign currency can always be met. |
