Monetary policy operating procedures: the Peruvian case

Both the objective and the powers of the central bank are clearly specified in its legal framework. In this respect, its aims and activities are transparent and explicit. Monetary policy influences the monetary aggregates through market instruments, sending clear signals to economic agents regarding the direction and objectives pursued. Despite major changes in monetary policy management, policy implementation still encounters problems. The main problems are: • A modest quantity of money: total liquidity (including deposits in local and foreign currency), i.e. the quantity of money in circulation in the economy, is equal to just over 180/0 of GDP with a high degree of dollarisation (almost 75 0/0 of total deposits is in foreign currency). The persistently low level of local currency means that seasonal liquidity flows, generated for example by tax payments, can become quite large in relative terms. • The central bank’s capacity to buy foreign exchange is restricted by the cost of sterilisation. This may induce a rise in interest rates, in turn attracting larger foreign capital inflows and leading to an appreciation of the exchange rate. • The dealing room’s intervention strategy has improved; however, it is still restricted to buy dollars, while maintaining a passive stance when the market requires a larger dollar supply. • Financial market segmentation: the financial market is made up of groups of institutions of widely different size and performance. Interinstitutional behaviour is therefore not homogeneous. Market segmentation creates situations in which the system as a whole can show a liquidity surplus, while on an individual basis some banks are encountering liquidity problems. Institutions with liquidity problems do not have access to interbank loans, owing either to the market’s inefficiency or to the institution’s specific situation. This creates a need for collateralised credits, bringing about an increase in the monetary base, despite the excess reserves in the system as a whole. As these entities’ demand for central bank CDs is usually small, the scope for repurchase operations as a source of funds is limited.