By: Assist. Prof. Dr. Ibrahim Rasoul Hani The Concept and Objectives of Monetary Policy Monetary policy is the set of actions and decisions taken by the central bank to achieve macroeconomic objectives, the most important of which are price stability, fostering economic growth, and achieving financial stability. In Iraq, for example, monetary policy relies on "information-based or signaling rules" to generate stability in the banking financial market, rather than direct intervention that might cause distortions in the market. The objectives of monetary policy include: Maintaining the purchasing power of the local currency. Combating inflation and curbing its negative expectations. Enhancing macroeconomic performance. Improving the standard of living through the stability of the financial system. Tools of Monetary Policy and their Impact on Commercial Banks 1. The Interest Rate (Monetary Policy Rate) The interest rate set by the Central Bank (known as the monetary policy rate) is one of the most influential tools on the banking sector. In Iraq, this rate is currently 7.5%, which directly affects the cost of borrowing and lending in the banking sector. When the Central Bank raises the interest rate: The cost of borrowing for commercial banks increases. Lending capacity decreases due to the higher cost of funds. Bank profit margins may improve if they can fully pass the increase on to borrowers. Demand for loans from individuals and companies decreases. Conversely, when the Central Bank lowers interest rates: The cost of funds for banks decreases. Demand for loans increases. Profit margins may narrow if deposit interest rates do not fall at the same pace. 2. The Required Reserve Ratio The required reserve ratio specifies the portion of deposits that banks must hold with the Central Bank, which cannot be used for lending. In Iraq, this ratio is 18% for current deposits. Impact of Reserve Requirement Changes: Increasing the Ratio: Reduces the funds available for lending, limiting the banks' ability to generate interest revenue. Decreasing the Ratio: Increases the liquidity available for lending, enhancing the banks' capacity to expand credit provision. 3. Open Market Operations (OMOs) OMOs involve the Central Bank buying and selling government bonds to influence liquidity in the banking system. Mechanism of Impact: Selling Bonds: Absorbs liquidity from the banking system, curbing the banks' lending capacity. Buying Bonds: Injects additional liquidity into the system, enhancing the banks' ability to expand credit. 4. Exchange Rate Policy Exchange rate management policies play a significant role in bank performance, especially in countries heavily reliant on imports or exports. Central Bank interventions in the foreign exchange market affect: The value of foreign currency-denominated assets and liabilities. The cost of external funding. Clients' ability to repay foreign currency-denominated loans. The Impact of Monetary Policy on Banking Performance Indicators 1. Profitability A study on the relationship between monetary policy and the financial performance of Jordanian commercial banks showed a statistically significant relationship between monetary policy tools and bank profitability indicators. Changes in interest rates affect: Net Interest Margins (the difference between lending and deposit rates). Interest income. Non-interest income (such as service fees). 2. Liquidity Monetary policy tools directly influence bank liquidity through: Changes in the required reserve ratio. Open Market Operations that alter the quantity of available cash. Additional liquidity requirements during times of crisis. 3. Solvency Prudent monetary policies help maintain bank solvency by: Controlling credit levels in the economy. Preventing the formation of credit bubbles. Providing mechanisms for emergency liquidity support when needed. Al-Mustaqbal University ranks first among private universities