Monetary Policy Descriptive Framework

MONETARY POLICY OBJETIVES

The main goal of CBH is to safeguard the internal and external value of the currency. The CBH is committed to sustain an inflation rate of one digit, establishing it as target in the 2008-2009 Monetary Program, specifically maintaining a range of 9.0 % ± 1.0% by the end of 2008, and a range of 8.0 % ± 1.0% by the end of 2009.

MONETARY POLICY STRATEGY

Liquidity Controls. The short term interest rates as operational variables and monetary aggregates as indicative goals. The level of the Monetary Policy Rate (MPR) and the management of CBH open markets operations are continuously evaluated by the Open Market Commission (OMC), who recommends any needed changes to the Board of Directors in order to meet the inflation target established in the Monetary Program, based on analysis of recent trends of the main national and international macroeconomic and financial variables, specially observed and expected inflation.

MONETARY POLICY RATE

The MPR signals the CBH`s policy stance. The MPR is the maximum interest rate allowed to purchase 7 day government securities in the weekly auctions held by the CBH exclusively for financial institutions.

MONETARY POLICY INSTRUMENTS

OPEN MARKET OR INDIRECT INSTRUMENTS

Open market operations are the main monetary policy instrument. They are carried out by the placement of the CBH`s securities in competitive auctions. Additionally, the CBH uses overnight operations through Permanent Credit Facilities (PCF) and Permanent Investment Facilities (PIF), as instruments to regulate liquidity in the Financial System.

NON MARKET OR DIRECT INSTRUMENTS

All liabilities in local and foreign currency except interbank operations and external debt are subject to a non-remunerated reserve requirement. Foreign currency deposits have an additional reserve requirement that financial institutions must hold on reserve on banks classified as investment grade.

The reserve requirement is computed every fourteen days, based on the average deposits of the previous fourteen days. A bank doesn’t have to meet the reserve requirement daily but on average for the fourteen day period. There is no restriction on the composition (the requirement can be met by cash or deposits in the CBH).

Since the middle of 2007, the CBH has used its direct instruments more actively, by the approval of a set of measures that aim to control inflation and redirect credit to productive areas. These measures are:

• An additional reserve requirement of 4% was approved in June 2007 for national currency deposits in the financial system.
• In March 2008, the Board of Directors approved an increase in the requirement of mandatory investments of the financial system in deposits in national currency, from four percent (4%) as of June 2007 to (9%). The increase is to be implemented gradually, starting with two percentage points on March and one percentage point in the following months until completing five percentage points.
• Simultaneously, in March 2008, the Board of Directors authorized banks to be subject to a lower reserve requirement on the loan portfolio aimed at productive activities other than consumption and trade. Thus, those institutions of the national financial system, that according to the monthly records of the National Banking and Insurance Commission, direct their domestic currency loan portfolios to activities other than consumption and trade in a proportion equal to or above 80%, will be benefited by gradual reductions in reserve requirements. This measure was applied starting on the first fourteen days of March increasing up to five percentage points in June of this year, date in which the requirement was 7.0%.
• Finally, in March 2008 the Board of Directors also approved a gradual decrease of 10% in the foreign currency additional reserve requirement, reducing it from 24% required in March to 14% in November 2008 (decreasing 2% every month). This applies to those institutions that according to the monthly records of the National Banking and Insurance Commission direct their foreign currency loan portfolios to activities other than consumption and trade in a proportion equal to or above 70%.