(MENAFN- Jordan Times) The Central Bank recently took an important step, announcing its decision to buy a big amount of government bonds from the portfolios of commercial banks.
The transactions are to take place through public auctions. The Central Bank thus introduced, or at least activated the "open market operations", a well-established instrument used by central banks to implement their monetary policy.
The purpose of this step was obviously to inject liquidity in the banking system and thus encourage banks to expand their capacity to lend to the private sector and raise the economic growth rate.
Few years ago, the Central Bank used to employ the certificates of deposits as its instrument of choice for practising its monetary policy. The obvious objective at the time was to withdraw excessive liquidity from the banking system and reduce the banks' ability to extend more credit and cause higher inflation.
It seems that the Central Bank has now turned around 180 degrees, shifting from withdrawing liquidity, a conservative policy, to pumping liquidity, an expansionary policy.
One wonders if this major shift of monetary policy was adopted in response to a change in circumstances that dictated a change in monetary policy, or merely to introduce a new instrument of monetary policy, namely open-market operations, which can be used either to pump more liquidity through buying bonds or to withdraw excessive liquidity through selling bonds, as changing circumstances may call for from time to time.
The main issue is whether the Central Bank should, under the present circumstances, follow a tighter monetary policy, as advised by the International Monetary Fund, or an expansionary policy, as indicated by the recent step mentioned above. In other words, is the Central Bank placing priority on stability, which calls for a tight monetary policy, or on economic growth, which calls for an expansionary policy?
One may also wonder if the Central Bank sees a high risk of too much inflation, which must be met with a tighter monetary policy, or of economic recession and low growth rate that it has in mind and should deal with accordingly, by easy money.
Analysts may be confused by the conflicting signals issued by the Central Bank, which is combining a tight policy through raising interest rates on the dinar, on the one hand, and an easy policy, through activating the open-market operations and using them to pump more liquidity into commercial banks, on the other, all at the same time.
It is true that economic circumstances are mixed, and opinions on dealing with them are even more so. There is no agreement on a scale of priority.
If the Central Bank finds itself at a crossroads, as far as the monetary policy is concerned, it should make up its mind on whether, at this point of time, the country needs economic growth more than economic stability, in which case it should become more aggressive; stability may justify a more conservative attitude.
What makes monetary policy more important now is the fiscal policy, which is almost neutralised and not subject to changes to serve economic objectives, because it is governed by necessities and limited resources.
The minister of finance has no space to manoeuvre. He cannot use financial policy to achieve a desired objective. His priority is to put off fire and search for more resources to reduce the budge deficit and make ends meet.
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