the monetary policy instruments of the magyar nemzeti bank mnb, financial analysis may 2012
TRANSCRIPT
The monetary policy instruments of the Magyar Nemzeti Bank
MNB, Financial analysis
May 2012
1. The place of the instruments within the inflation
targeting regime
2. The structure of the instruments
3. Determinants of interbank liquidity on the aggregate
level
4. Shocks to the liquidity of the banking system and
their management 2
Topics
The primary objective of the MNB shall be to achieve and maintain price stability. 3
The goals of monetary policy
Final target
• achievement of price stability: inflation around 3%• inflation target continuously since 2007: 3%+/-1%
Intermediate target
• inflation forecast to be close to the inflation target• latest forecast: 5.6% for 2012; 3% for 2013
Direct, operational target:
• short term market interest rates to be consistent with the central bank base rate and with the expectations of it
• short term: 3-6 months
A jegybank elsődleges célja az árstabilitás elérése és fenntartása.
The system of monetary policy instruments of the MNB
4
Main policy instrument:
2-week MNB-bill
Operational target:
Short term interest rate = expected base
rate
Intermediate target:
Inflation forecast =
= medium term inflation target
Final target:
Price stability
A jegybank elsődleges célja az árstabilitás elérése és fenntartása.
Decision making mechanism of the MNB
5
Inflation and real economy forecast
Monetary Council (MC): Decision on the level of interest rate
Monetary instruments
Short term interest rates adjust to the base rate
Information
Effects of the transmission channels originating from the change in the interest
rate
Money market analysis
Financial stability analysis
A jegybank elsődleges célja az árstabilitás elérése és fenntartása.
Transmission channels: how the monetary policy decisions affect output and inflation
6
Source: Monetary policy in Hungary (2012)
1. The place of the instruments within the inflation
targeting regime
2. The structure of the instruments
3. Determinants of interbank liquidity on the aggregate
level
4. Shocks to the liquidity of the banking system and
their management7
Topics
A jegybank elsődleges célja az árstabilitás elérése és fenntartása.
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 rate― To 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 instruments― Market conform structure (indirect tools)― Transparent, secure and cost efficient structure― Equal treatment of market counterparties― Support of market building
8
A jegybank elsődleges célja az árstabilitás elérése és fenntartása.
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 bank
• Counterparties: credit institutions subject to reserve requirements who accomplish certain technical conditions― Membership 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 included― In case of quick tenders only banks
9
A jegybank elsődleges célja az árstabilitás elérése és fenntartása.
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 requirements
• The cause of the permanent liquidity surplus: ― former intervention at the strong edge of the crawling
pegged exchange rate mechanism― FX inflow of privatisations and of FX debt securities
issuances of the Sovereign Debt Management Centre (ÁKK) exchanged to forint at the MNB
― conversion of EU funds at the MNB
• The banking system holds the permanent surplus liquidity in the form of MNB-bills
• The MNB passively drains out, sterilizes the surplus liquidity
• As 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)
10
A jegybank elsődleges célja az árstabilitás elérése és fenntartása.
The standard forint market instruments
OBJECTIVE INSTRUMENT FORM EFFECT
Monetary policy
managementBase rate Two-week bill
Influence of short term
yields
Smoothing the volatility of interbank interest rates
Interest rate corridor
Overnight deposit Limiting
fluctuations of interest
rates
Overnight collateralized
loan
Reserve requirements
Averaging mechanism
Reduces the volatility of
interest rates
Quick tenderDeposit or
collateralized loan
Management of
unexpected liquidity shocks
11
A jegybank elsődleges célja az árstabilitás elérése és fenntartása.
The main instrument of the central bank
• Two-week bill• Credit institutions can buy it without upper limit on a
weekly basis• The 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 bank• Directly affects short term interest rates (operatioiinal
target)• Change in the base rate has a signalling effect, it
influences the expectations of market participants
12
A jegybank elsődleges célja az árstabilitás elérése és fenntartása.
Interest rate corridor
• Corridor between the interest rates of the central bank overnight (O/N) lending and deposit facilities
• Standing 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 rate
• In case of temporary liquidity need: overnight loan opportunity against security collateral; in case of temporary liquidity surplus: deposit opportunity
• In the interbank market overnight rates fluctuate between the two edges of the interest rate corridor
• Cautious 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
13
Overnight market interest rates within the central bank interest rate corridor
14
0
1
2
3
4
5
6
7
8
9
10
11
0
30
60
90
120
150
180
210
240
270
300
330
05.0
1.20
0904
.02.
2009
06.0
3.20
0906
.04.
2009
08.0
5.20
0910
.06.
2009
10.0
7.20
0911
.08.
2009
11.0
9.20
0913
.10.
2009
13.1
1.20
0915
.12.
2009
18.0
1.20
1017
.02.
2010
22.0
3.20
1022
.04.
2010
25.0
5.20
1024
.06.
2010
26.0
7.20
1026
.08.
2010
27.0
9.20
1027
.10.
2010
29.1
1.20
1029
.12.
2010
28.0
1.20
1101
.03.
2011
01.0
4.20
1104
.05.
2011
03.0
6.20
1106
.07.
2011
05.0
8.20
1106
.09.
2011
06.1
0.20
1108
.11.
2011
08.1
2.20
1110
.01.
2012
09.0
2.20
1212
.03.
2012
13.0
4.20
12
percentageHUF billion
Turnover of unsecured overnight interbank depo transactionsTurnover of overnight interbank repo transactionsInterest rate of overnight interbank repo transactionsInterest rate of unsecured overnight interbank depo transactionsBase rate
A jegybank elsődleges célja az árstabilitás elérése és fenntartása.
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 bank
• Its aim: reduction of the volatility of money market interest rates
• Averaging mechanism: monthly average of end-of-day reserve account balances should equal the reserve requirements― In case of temporary liquidity deficit reserve account
balances can be lower, in case of temporary liquidity surplus they can be higher
• No implicit taxation already, reserves are remunerated at market interest rates
• Since the crisis front-loaded reserve holding15
A jegybank elsődleges célja az árstabilitás elérése és fenntartása.
Other and unconventional central bank instruments
• Tenders, open market operations― Longer 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 tender ― In case of temporary liquidity problem of the banking
system, rarely used instrument (e.g. Autumn 2001)
16
A jegybank elsődleges célja az árstabilitás elérése és fenntartása.
Acceptable collaterals
• Central bank credit can be granted only against collateral
• Acceptable securities: government bonds, mortgage bonds, appropriately rated bonds (of banks, of corporates), municipal bonds
• Collateral management in practice― Lombard loan and not classical repo― Pooling (one security portfolio serves for all central bank
loans) ― Haircut dependent on the type and maturity of collateral― Daily revaluation, in case of need additional collateral
placement
17
1. The place of the instruments within the inflation
targeting regime
2. The structure of the instruments
3. Determinants of interbank liquidity on the aggregate
level
4. Shocks to the liquidity of the banking system and
their management18
Topics
A jegybank elsődleges célja az árstabilitás elérése és fenntartása. 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
J anuary
2008
J anuary
2012Change
J anuary
2008
J anuary
2012Change
Foreign claims (FX
reserves)4396 11680 7284
Currency in
circulation2166 2796 630
Loans granted to
credit institutions0 26 26 2-week MNB-bill 687 3683 2996
Hungarian
government bond147 169 22
Current accounts of
credit institutions701 468 -233
FX-swaps with credit
institutions0 506 506
O/ N deposits of
credit institutions18 597 579
FX-swaps due to euro
sell tenders0 262 262
FX-swaps with credit
institutions0 506 506
Other assets 126 283 157FX-swaps due to euro
sell tenders0 262 262
Government deposits 452 1439 987
Other liabilities and
equity645 3174 2529
Total assets 4669 12926 8257 Total liabilities 4669 12926 8257
ASSETS LIABILITIES
Cumulated change in the main balance sheet items of the MNB since January 2008 (monthly averages)
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)
-1 000
0
1 000
2 000
3 000
4 000
5 000
6 000
7 000
8 000
-1 000
0
1 000
2 000
3 000
4 000
5 000
6 000
7 000
8 000
Janu
ary
2008
Mar
ch 2
008
May
200
8
July
200
8
Sept
embe
r 200
8
Nove
mbe
r 200
8
Janu
ary
2009
Mar
ch 2
009
May
200
9
July
200
9
Sept
embe
r 200
9
Nove
mbe
r 200
9
Janu
ary
2010
Mar
ch 2
010
May
201
0
July
201
0
Sept
embe
r 201
0
Nove
mbe
r 201
0
Janu
ary
2011
Mar
ch 2
011
May
201
1
July
201
1
Sept
embe
r 201
1
Nove
mbe
r 201
1
Janu
ary
2012
Mar
ch 2
012
HUF billionHUF billion
Foreign claims Two-week MNB-bill Deposits of central government
Currency in circulation Other liabilities and equity
A jegybank elsődleges célja az árstabilitás elérése és fenntartása.
Changes in the liquidity surplus of the banking system on the long run go along with changes in MNB-bills
The amount of MNB-bills increase when• some asset side item of the central bank balance
sheet increases:– Amount of loans granted to banks increase– FX 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 bills
– Current account balance of banks decreases (e.g. reduction in the required reserve ratio) => excess reserves are tied down in two-week bills 21
A jegybank elsődleges célja az árstabilitás elérése és fenntartása.
•Government account ↓
• MNB-bill↑
•FX reserves ↑ •Government account ↑
•Treasury account ↑
• MNB-bill ↓
Balance sheet of the MNB
The government finances itself in forint:
22
The government finances itself in foreign exchange:
FX borrowing
Redemption of government bond
Positive net forint government bond issuance
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.
At the end of the day total assets of the MNB increase, FX reserves and two-week bills also increase.
The amount of MNB-bills has increased since 2008 due to FX borrowing instead of issuing forint government bonds
Balance sheet of the MNB
Balance sheet of the MNB
1. The place of the instruments within the inflation
targeting regime
2. The structure of the instruments
3. Determinants of interbank liquidity on the aggregate
level
4. Shocks to the liquidity of the banking system and
their management23
Topics
A jegybank elsődleges célja az árstabilitás elérése és fenntartása.
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 general
• Shocks 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 payment
• Central bank instruments support the management of system wide liquidity shocks (reserve requirements, interest rate corridor, intraday and longer term loans)
24
A jegybank elsődleges célja az árstabilitás elérése és fenntartása.
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.
25
A jegybank elsődleges célja az árstabilitás elérése és fenntartása.
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.
26
A jegybank elsődleges célja az árstabilitás elérése és fenntartása.
The other source of shocks to the aggregate liquidity of the banking system is the change in demand for currency• Changes in the demand for currency cause smaller
liquidity shocks (daily 10-20 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 half
• Yearly seasonal patterns: hike in the demand for currency holding before end-of-the-year and midyear holidays, while decrease after holidays
• On 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.
27
28
Year-on-year growth rate of currency holding of the public and the inflation
-6
-4
-2
0
2
4
6
8
10
12
-6
-4
-2
0
2
4
6
8
10
1220
00.I II III IV
2001
.I II III IV20
02.I II III IV
2003
.I II III IV20
04.I II III IV
2005
.I II III IV20
06.I II III IV
2007
.I II III IV20
08.I II III IV
2009
.I II III IV20
10.I II III IV
2011
.I II III IV20
12.I
percentagepercentage
Quarterly average inflation Growth rate of currency
A jegybank elsődleges célja az árstabilitás elérése és fenntartása.
Opportunities of interbank liquidity management
Weekly average expected liquidity surplus― Banks 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-bills
Management of the effects of intraweek liquidity shocks― Change of current account balance (averaging
mechanism of the reserve requirement system)― Interbank (O/N) lending or borrowing― Recourse to the interest rate corridor of the MNB (O/N
deposit or loan)
29
A jegybank elsődleges célja az árstabilitás elérése és fenntartása. 30
Literature
• Monetary 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 2010)