How bank of PNG use discount rate and provide some examples and citation and full references

Answer 1

The Bank of Papua New Guinea (BPNG) utilizes the discount rate as a monetary policy tool to regulate the economy, manage inflation, and influence lending rates in the financial system. The discount rate is essentially the interest rate charged to commercial banks for short-term loans obtained from the central bank, and it plays a significant role in controlling liquidity in the economy.

How the Discount Rate Works

1. Monetary Policy Tool: The BPNG adjusts the discount rate to influence economic activity. Lowering the discount rate makes borrowing cheaper for commercial banks, which can encourage spending and investment. Conversely, increasing the rate can help cool down an overheating economy by making loans more expensive.

2. Inflation Control: By adjusting the discount rate, the BPNG aims to control inflation. For example, if inflation is rising quickly, the bank may increase the discount rate to reduce money supply and curtail spending.

3. Bank Liquidity: The discount rate serves as a tool for maintaining liquidity in the banking system. During times of financial stress, banks may borrow from the BPNG at the discount rate, ensuring they have the necessary funds to operate and meet withdrawal demands.

Examples

1. Inflation Response: If Papua New Guinea experiences high inflation at 10%, the BPNG may increase the discount rate from 6% to 8%. This action could reduce consumer spending and business investments, ideally leading to lower inflation.

2. Economic Stimulus: In a situation where the economy is contracting, and growth is slow (e.g., GDP growth falls to 1% or below), the BPNG may lower the discount rate from 7% to 5% to encourage banks to lend more, stimulating economic activity.

3. Crisis Management: During economic crises, such as the COVID-19 pandemic, the BPNG may lower the discount rate to provide liquidity and support businesses facing liquidity shortages. For instance, in 2020, central banks around the world, including the BPNG, adopted measures to lower borrowing costs through reduced rates.

References

1. Bank of Papua New Guinea. (2020). Monetary Policy Statement. Retrieved from Bank of Papua New Guinea

2. Bank of Papua New Guinea. (2021). Annual Report 2020. Retrieved from Bank of Papua New Guinea

3. World Bank. (2021). Papua New Guinea Economic Update. Retrieved from World Bank

4. International Monetary Fund. (2021). Papua New Guinea: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Papua New Guinea. Retrieved from IMF

This framework illustrates the strategic use of the discount rate by the Bank of Papua New Guinea to influence monetary conditions and economic outcomes. For an accurate understanding of current practices and the latest adjustments in the discount rate, I recommend checking the latest monetary policy statements and reports from the BPNG.