Presentation on theme: "The monetary policy instruments of the Magyar Nemzeti Bank"— Presentation transcript:
1 The monetary policy instruments of the Magyar Nemzeti Bank MNB, Financial analysisMay 2012
2 TopicsThe place of the instruments within the inflation targeting regimeThe structure of the instrumentsDeterminants of interbank liquidity on the aggregate levelShocks to the liquidity of the banking system and their management
3 The goals of monetary policy Final targetachievement of price stability: inflation around 3%inflation target continuously since 2007: 3%+/-1%Intermediate targetinflation forecast to be close to the inflation targetlatest forecast: 5.6% for 2012; 3% for 2013Direct, operational target:short term market interest rates to be consistent with the central bank base rate and with the expectations of itshort term: 3-6 months
4 The system of monetary policy instruments of the MNB Final target:Price stabilityIntermediate target:Inflation forecast == medium term inflation targetOperational target:Short term interest rate = expected base rateMain policy instrument:2-week MNB-bill
5 Decision making mechanism of the MNB Financial stability analysisMonetary Council (MC): Decision on the level of interest rateMoney market analysisInformationInflation and real economy forecastEffects of the transmission channels originating from the change in the interest rateMonetary instrumentsShort term interest rates adjust to the base rate
6 Transmission channels: how the monetary policy decisions affect output and inflation Source: Monetary policy in Hungary (2012)
7 TopicsThe place of the instruments within the inflation targeting regimeThe structure of the instrumentsDeterminants of interbank liquidity on the aggregate levelShocks to the liquidity of the banking system and their management
8 The goal and basic principles of the monetary policy instruments On the basis of the real economy and inflation forecast, on the money market situation and on financial stability issues decision makers decide on which level of interest rate they think the inflation target achievable.The task of the instruments is to ‘adjust’ the money market yields to the level of the base rateTo reflect the actual level and the expectations on changes in the rate.Not to depend on the liquidity situation, on interbank market processes.The basic principles of the instrumentsMarket conform structure (indirect tools)Transparent, secure and cost efficient structureEqual treatment of market counterpartiesSupport of market building
9 What are the instruments and who are the counterparties of the MNB? Monetary policy instruments: all the forint and FX market operations of the central bankCounterparties: credit institutions subject to reserve requirements who accomplish certain technical conditionsMembership in the Hungarian real-time gross settlement system (VIBER) or in the Interbank Clearing System (BKR)Securities account with the central securities depository and security settlement system (KELER Zrt.)Different scope of counterparties possible according to the aims of the various instruments (e.g. in case of instruments aimed at quick intervention)In case of certain FX market instruments non-residents includedIn case of quick tenders only banks
10 The forint market instruments The design of it is determined by the fact that the liquidity of domestic banks is permanently higher than what is needed to fulfil reserve requirementsThe cause of the permanent liquidity surplus:former intervention at the strong edge of the crawling pegged exchange rate mechanismFX inflow of privatisations and of FX debt securities issuances of the Sovereign Debt Management Centre (ÁKK) exchanged to forint at the MNBconversion of EU funds at the MNBThe banking system holds the permanent surplus liquidity in the form of MNB-billsThe MNB passively drains out, sterilizes the surplus liquidityAs a result, the main policy instrument of the MNB is on the deposit side (and not on the lending side as e.g. at the ECB)
11 The standard forint market instruments OBJECTIVEINSTRUMENTFORMEFFECTMonetary policy managementBase rateTwo-week billInfluence of short term yieldsSmoothing the volatility of interbank interest ratesInterest rate corridorOvernight depositLimiting fluctuations of interest ratesOvernight collateralized loanReserve requirementsAveraging mechanismReduces the volatility of interest ratesQuick tenderDeposit or collateralized loanManagement of unexpected liquidity shocks
12 The main instrument of the central bank Two-week billCredit institutions can buy it without upper limit on a weekly basisThe MC determines the interest rate of it (key policy rate, base rate)Its aim: management of the money market interest rates in a way considered optimal by the central bankDirectly affects short term interest rates (operatioiinal target)Change in the base rate has a signalling effect, it influences the expectations of market participants
13 Interest rate corridor Corridor between the interest rates of the central bank overnight (O/N) lending and deposit facilitiesStanding facilities at interest rates less favourable than the key policy rate (currently at +/-1%)Aim: moderate the volatility of money market interest rates, small differences from the key policy rateIn case of temporary liquidity need: overnight loan opportunity against security collateral; in case of temporary liquidity surplus: deposit opportunityIn the interbank market overnight rates fluctuate between the two edges of the interest rate corridorCautious liquidity management in banks since the crisis, which results in accumulation of O/N deposits and in interbank interest rates close to the lower bound of the interest rate corridor
14 Overnight market interest rates within the central bank interest rate corridor
15 The role of the reserve requirement system Banks must deposit a part (2-5% of less than 2-year maturity liabilities subject to reserve requirement) of their liabilities with the central bankIts aim: reduction of the volatility of money market interest ratesAveraging mechanism: monthly average of end-of-day reserve account balances should equal the reserve requirementsIn case of temporary liquidity deficit reserve account balances can be lower,in case of temporary liquidity surplus they can be higherNo implicit taxation already, reserves are remunerated at market interest ratesSince the crisis front-loaded reserve holding
16 Other and unconventional central bank instruments Tenders, open market operationsLonger term loan tenders (2-week, 6-month, 2-year)FX-swap instruments (overnight, 3-month, until 2010 also 6- month)Mortgage bond program (2010)Government bond sell and purchase on the secondary market, rarely used instrument (e.g. during the government bond market turbulence of Autumn 2008)Quick tenderIn case of temporary liquidity problem of the banking system, rarely used instrument (e.g. Autumn 2001)
17 Acceptable collaterals Central bank credit can be granted only against collateralAcceptable securities: government bonds, mortgage bonds, appropriately rated bonds (of banks, of corporates), municipal bondsCollateral management in practiceLombard loan and not classical repoPooling (one security portfolio serves for all central bank loans)Haircut dependent on the type and maturity of collateralDaily revaluation, in case of need additional collateral placement
18 TopicsThe place of the instruments within the inflation targeting regimeThe structure of the instrumentsDeterminants of interbank liquidity on the aggregate levelShocks to the liquidity of the banking system and their management
19 The MNB is the bank of banks, thus changes in the liquidity position of the banking system are tracked in the MNB’s balance sheetChange of the monthly average statistical balance sheet of the MNB, January 2008-January 2012, HUF billion
20 In the last 3,5 years along with the increase in FX reserves the liquidity surplus of the banking system has increased (the amount of two-week bills has climbed)Cumulated change in the main balance sheet items of the MNB since January 2008 (monthly averages)
21 Changes in the liquidity surplus of the banking system on the long run go along with changes in MNB-billsThe amount of MNB-bills increase whensome asset side item of the central bank balance sheet increases:Amount of loans granted to banks increaseFX reserves (the central bank buys foreign exchange on the market)Securities portfolio increases (the central bank buys government bond, mortgage bond on the market)or some liability side item of the central bank balance sheet decreases:Government account balance decreases (e.g. pension payments) => the current account balance of the banking system increases, resulting in the increase in two-week billsCurrent account balance of banks decreases (e.g. reduction in the required reserve ratio) => excess reserves are tied down in two-week bills
22 The government finances itself in forint: The amount of MNB-bills has increased since 2008 due to FX borrowing instead of issuing forint government bondsBalance sheet of the MNBThe government finances itself in forint:Positive net forint government bond issuanceTreasury account ↑MNB-bill ↓At the end of the day MNB-bills of banks decrease. Total assets of the balance sheet does not change, only the structure of liabilities changes.The government finances itself in foreign exchange:Balance sheet of the MNBFX borrowingFX reserves ↑Government account ↑Balance sheet of the MNBRedemption of government bondGovernment account ↓MNB-bill↑At the end of the day total assets of the MNB increase, FX reserves and two-week bills also increase.
23 TopicsThe place of the instruments within the inflation targeting regimeThe structure of the instrumentsDeterminants of interbank liquidity on the aggregate levelShocks to the liquidity of the banking system and their management
24 Liquidity shocks of the banking system There is fundamental difference between liquidity shocks of individual banks and of the banking system as a whole:On the individual level risk takes the form of unpredictable customer transactions (inflows and outflows as well)Individual liquidity shocks are manageable in the interbank money market in generalShocks to the banking system as a whole reach all individual banks at the same time (though to different extent).Autonomous liquidity factors: transactions of treasury account, currency in circulation,Transactions of the MNB: FX transactions, interest paymentCentral bank instruments support the management of system wide liquidity shocks (reserve requirements, interest rate corridor, intraday and longer term loans)
25 A source of liquidity shocks to the banking system is the variability of the treasury account Government purchases increase, incomes decrease the liquidity surplus of the banking system:The majority of government expenditures (e.g. salary payments of the public sector, pension payments) arrive to current accounts held at banks, thus increase the liquidity of banks through payment systems (the structure of the liability side of the balance sheet of the MNB changes)In case of tax income (the largest item is the value added tax) companies transfer money from their bank accounts to the treasury account, while reducing the liquidity of the banking system.Debt financing items have a similar effect to the liquidity of the banking system: interest payments and redemptions are government expenditures to bank customers, thus increase the liquidity, while issuance of government bonds decreases the liquidity of banks.
26 The volatility of treasury accounts is the most important autonomous liquidity factor The daily movements of the treasury account are hardly predictable and have a significant liquidity effect (200 HUF bn a day in some cases).The smoothing of the treasury account supports the reduction of the volatility of money market yields:When the free liquidity of the banking system increases and the treasury account balance decreases due to government expenditures (e.g. pension payments), borrowing of the ÁKK (reverse repo) elevates the balance of the treasury account and decreases the liquidity surplus of the banking system at the same time.When government income (e.g. VAT) increases the treasury account balance and the liquidity surplus of banks decreases, equilibrium is achieved by money market lending (repo) of the ÁKK.
27 The other source of shocks to the aggregate liquidity of the banking system is the change in demand for currencyChanges in the demand for currency cause smaller liquidity shocks (daily HUF bn maximum) and are better predictable.The demand for currency of the economy is driven on the one hand by seasonal factors:Weekly seasonality: demand for currency decreasing in the first half of the week and increasing in the second halfYearly seasonal patterns: hike in the demand for currency holding before end-of-the-year and midyear holidays, while decrease after holidaysOn the other hand economic growth and inflation also affects the demand for money.As a non-interest bearing instrument the opportunity cost of holding currency changes with inflation. The decrease (increase) in inflation usually has been followed by the increase (decrease) in the growth rate of currency holding of the public.
28 Year-on-year growth rate of currency holding of the public and the inflation
29 Opportunities of interbank liquidity management Weekly average expected liquidity surplusBanks can manage optimally their liquidity surplus by quotation of MNB-bills (available once a week)The MNB publishes a liquidity forecast every week, just before the auction of the MNB-billsManagement of the effects of intraweek liquidity shocksChange of current account balance (averaging mechanism of the reserve requirement system)Interbank (O/N) lending or borrowingRecourse to the interest rate corridor of the MNB (O/N deposit or loan)
30 LiteratureMonetary policy in Hungary (2006, 2012)Detailed monetary policy instruments (2009)Komáromi, András: The effect of the monetary base on money supply – Does the quantity of central bank money carry any information? MNB Bulletin (June 2007)Balogh, Csaba: The role of MNB bills in domestic financial markets. What is the connection between the large volume of MNB bills, bank lending and demand in the government securities markets? MNB Bulletin (October 2009)Varga, Lóránt: Introducing optional reserve ratios in Hungary MNB Bulletin (October 2010)Molnár, Zoltán: About the interbank HUF liquidity - what does the MNB’s new liquidity forecast show? MNB Bulletin (December )