Markets Committee

Institutional framework

At the beginning of March 1999, the Brazilian Government announced its intention to start conducting the monetary policy based on an inflation targeting framework. Brazil formally adopted the inflation targeting regime as monetary policy guideline with the edition of the Decree 3,088 by the President of the Republic, on 21 June 1999. On 30 June 1999, the National Monetary Council (CMN) issued the Resolution 2,615, which defined the reference price index and inflation targets for 1999 and for the two years thereafter.

In Brazil, the inflation target is set in terms of the year-over-year rate of increase in the Broad National Consumer Price Index (IPCA), one of the Brazilian CPIs. This index is calculated by the Brazilian Institute of Geography and Statistics (IBGE). The Brazilian regime considers a headline index as reference, in line with most countries that adopt formal targets for inflation.

Most central banks use a short-term interest rate as the main instrument of policy. Likewise, the Brazilian inflation targeting regime uses the Selic rate as the primary instrument of monetary policy. The Selic rate is the average interest rate charged on the daily loans with a maturity of one day (overnight) backed by government securities registered in the Special System for Settlement and Custody (Selic), ie, the interest rate that balances the market for bank reserves. The Monetary Policy Committee (Copom) sets the target for the Selic rate, and it is up to the open market desk operations of the Banco Central do Brasil (BCB) to keep the effective Selic rate close to the target.

Key features of the monetary policy implementation framework

1. Open market operations

Open market operations (OMO) comprise purchases and sales of securities in the secondary market, either outright transactions or considering resale and repurchase agreements (repos). On its OMO, the BCB uses exclusively federal public debt securities under custody in Selic.

The BCB manages excess bank liquidity. To manage this excess liquidity, the BCB conducts daily sales operations of federal securities, from its portfolio, with a commitment to repurchase at a future date (reverse repo), through competitive auctions. Nowadays, the term of these operations ranges from 1 to 180 days.

Early in the morning, around 9 am, the BCB conducts overnight auctions to drain excess liquidity. The 45-day reverse repo operation occurs on the day after the Copom's meeting and lasts until the next Committee meeting.

The long-term reverse repo (3 and 6-month) takes place every day, alternately, at the end of the morning.

Still at the end of the day, the open market trading desk injects and/or drains liquidity at punishing rates (standing facility).

To define its strategy for managing bank liquidity, the BCB develops liquidity forecasts for up to 6 months, with daily adjustments.

The main factors affecting bank liquidity in Brazil are US dollar buying/selling, banks' reserve requirements movements and the National Treasury operations (revenues, expenses, redemption/placement of debt securities).

2. Reserve requirements and standing credit facilities.

In order to set a cap on money market rates (repo market) and fine tune liquidity, BCB has standing credit facilities, available in two different terms: intraday and overnight. Liquidity is provided through repo operations, accepting only government securities as collateral. These facilities have "zero" costs and 100 bps over the policy rate, respectively.

Within the monetary policy operational framework, reserve requirements (RR) have also a role for liquidity absorption. They represent an exogenous factor in determining the setup of liquidity absorption OMO. Currently, the RR framework consist of three different types, according to types of financial institutions liabilities. They aim not only at contributing to sterilisation of bank reserves, but also at keeping liquidity buffers for financial stability reasons.

RR on demand deposits have an objective of creating a demand for bank reserves to assure adequate functioning of the money market and of the Brazilian Payment System. It has also a role in monetary policy by limiting the multiplier effect on commercial bank money. RR on demand deposits are met through the average of balances within a two-week maintenance period and reserve balances are not remunerated.

RR on time deposits have the objectives of keeping liquidity buffers that can be used in liquidity shortage situations, and of absorbing liquidity as a secondary instrument. They have neutral effect on market rates, once they are remunerated at the policy rate (Selic). RR on savings deposits work as a liquidity buffer that aids the management of assets and liabilities related to earmarked credit (real estate lending and rural credit) in the financial system. They are remunerated at same rates as those of savings deposits. Both remunerated required reserves are kept in different accounts at BCB, that can be drawn, without cost, for intraday usage.

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Institutional framework

The Bank of Canada Act 1 establishes that the principal role of the Bank of Canada (BoC) is "to promote the economic and financial welfare of Canada". To achieve this mandate, the BoC has four main areas of responsibility, which are: Monetary Policy, Financial System, Currency and Funds Management.

The objective of monetary policy in Canada is to preserve the value of money by keeping inflation low, stable and predictable. The main tools in Canada's monetary policy framework are the inflation-control target and the flexible exchange rate. In 2016, the Government of Canada and the BoC renewed Canada's inflation-control target for a further five-year period, ending December 31, 2021 and will aim to keep inflation 2 at 2 per cent, with a control range of 1 to 3 per cent. The BoC's Governing Council is responsible for the day-to-day conduct of monetary policy.

The inflation-control target guides the BoC's decisions on the appropriate setting for the policy interest rate, which is aimed at maintaining a stable price environment over the medium term. The BoC announces its policy rate settings on 8 fixed announcement dates 3 throughout the year.

Canada's flexible exchange rate, or floating dollar, permits the BoC to pursue an independent monetary policy that is best suited to Canada's economic circumstances and is focused on achieving the inflation target.

Key features of the monetary policy implementation framework 4

The Bank of Canada implements monetary policy by influencing short-term interest rates through one of two alternative frameworks – an interest rate corridor system or a floor system – depending on how the BoC manages its balance sheet and supplies liquidity to the payment system. 5 It does this by setting a target for the overnight rate (often referred to as the policy rate), which determines the rates at which banks and other financial system participants borrow and lend at the shortest end of the yield curve. Interest rates on standing deposit and lending facilities, which are set according to the relevant operational framework, and open market operations help reinforce the BoC's target.

For the overnight target rate, the Bank of Canada targets the rate on collateralised, market-based overnight transactions. The BoC uses the general collateral (GC) repo rate as its guide to conditions in the overnight market. It is the primary, actively traded and most transparent collateralised overnight rate in Canada and allows the BoC to determine whether open market operations are required to reinforce the target for the overnight rate. The level of the overnight interest rate and expectations about its future path both influence other longer-term interest rates, as well as a broader range of asset prices.

Key features of the BoC's framework that function together to help achieve the targeted policy rate are as follows:

• Target for the overnight rate: the key policy interest rate that the BoC sets to meet its monetary policy objectives, also serves as a signal to major participants in the money markets as to what rate the BoC is aiming for participants to lend/borrow money in the overnight market.
• Interest rates associated with the Bank's standing deposit/liquidity facilities: these rates steer market participants to lend/borrow money in the overnight market near the target rate.
• Settlement Balances or Cash Setting: the amount of excess or deficit deposits supplied to participants in the Lynx 6 payment system on a daily basis.
• Open market operations: open market Overnight Repo (OR) / Overnight Reverse Repo (ORR) transactions that are conducted to reinforce the target overnight rate.

The Bank of Canada's implementation of monetary policy is closely linked to the level of liquidity in Canada's main payment system (Lynx) 6 – through which almost all payments (measured by value) flow – and the management of the BoC's balance sheet. Under normal course, when the BoC's acquisition of financial assets is driven by government deposits 7 and the issuance of bank notes, and the supply of settlement balances is limited (close to zero), the BoC operates under an interest rate corridor system. In exceptional circumstances, when extraordinary lending and asset purchases are conducted for policy purposes and settlement balances grow to fund these operations, it is generally necessary to implement monetary policy using a floor system. 5

In an interest rate corridor system, the target for the overnight rate is set at the mid-point of a 50 basis point interest rate corridor, or operating, band which is supported by standing deposit and lending facilities available to direct members in Lynx. The BoC lends money against collateral at the top of the band (the "Bank Rate" at target plus 25 basis points) or takes deposits at the bottom of the band (the "Deposit Rate" at target minus 25 basis points). This encourages transactions for overnight funds in the market at rates within the band. If no excess balances are left in the system, then the aggregate position of all Lynx members in their settlement accounts with the BoC at the end of the day will be zero. As such, members with a deficit/positive balance are aware that an offsetting positive/deficit position exists with one or more other members. Positive balances are remunerated by the BoC at the Deposit Rate, while deficit positions must be covered by taking an overnight collateralised advance from the BoC at the Bank Rate.

In a floor system, the target for the overnight rate is set equal to the Deposit Rate, and the Bank Rate is set at the target rate plus 25 bps. The Bank creates at least enough settlement balances to drive the overnight rate down to equal the Deposit Rate.

Another key feature of the Bank of Canada's framework is the ability to adjust the level of settlement balances in the system to support trading at the target rate and address frictions in the payments system. However, unexpected payment frictions in the market can sometimes cause the overnight rate to move away from the BoC's target rate during the day. In cases where the BoC judges that the deviation is a result of generalised pressure on liquidity, it can offset this pressure by adding or withdrawing liquidity with open market operations. Changing the level of settlement balances to reinforce the target rate has been an effective policy tool for implementing monetary policy. For example, in past years the targeted level of settlement balances has been adjusted in anticipation of seasonal or temporary upward pressure on the overnight rate around quarter-ends or year-ends. Increasing settlement balances provides a strong incentive for market players to lend their cash earlier in the day, thus putting downward pressure on the overnight rate.

In exceptional circumstances, such as when the BoC seeks to provide additional monetary stimulus at very low interest rates (i.e., the effective lower bound), the BoC can create settlement balances to fund large scale purchases of qualifying high-quality assets, 8 such as Government of Canada marketable securities denominated in Canadian dollars. 9 The money paid by the BoC to Primary Dealers and other participants in exchange for the purchased assets ultimately becomes positive settlement balances, then deposited back at the end of the day with the BoC at the Deposit Rate.

The last key feature of the Bank of Canada's framework is the ability to reinforce the target for the overnight rate throughout the day by conducting open market operations at the target rate. When the conditions in the Canadian general collateral overnight repo market so warrant, the BoC may intervene and inject intraday liquidity through overnight repurchase agreements (OR operations) or withdraw intraday liquidity through reverse repurchase agreements (ORR operations). These operations are conducted through a competitive auction to channel funds to the counterparties that need them most, and if necessary, the BoC is prepared to enter into multiple rounds of open market operations.

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Institutional framework

Article 3 of the Law of the People's Republic of China on the People's Bank of China establishes that "the objective of monetary policy is to maintain the stability of the value of the currency and thereby promote economic growth."

Article 2 of the Law of the People's Republic of China on the People's Bank of China establishes that "the People's Bank of China shall, under the leadership of the State Council, formulate and implement monetary policy"

Article 23 of the Law of the People's Republic of China on the People's Bank of China establishes that "to implement monetary policy, the People's Bank of China may use the following monetary policy instruments: (1) requiring banking financial institutions to place deposit reserves at a prescribed ratio; (2) deciding on the benchmark interest rates of the central bank; (3) providing discount services to banking financial institutions that have opened accounts in the People's Bank of China; (4) providing loans to commercial banks; (5) purchasing and selling central government bonds and other government securities, financial bonds, and foreign exchange on the open market; and (6) other monetary policy instruments decided by the State Council".

Key features of the monetary policy implementation framework

First, a series of monetary-policy instruments, including Open Market Operation (OMO), Required Reserve Ratio (RRR), Medium-term Lending Facility (MLF), and Standing Lending Facility (SLF) etc are employed to manage liquidity in the banking system.

With recent reform, the PBC established a new RRR framework featuring "three tranches of reserve requirements and two additional preferential treatments" to guide small and medium-sized banks to provide services to local enterprises and to the real economy. "Three tranches" refer to three levels of the RRR based on the systemic importance, the institution type, and service positioning of the financial institutions. The first tranche applies to large banks to reflect the requirements to prevent systemic risks and maintain financial stability. The second tranche, whose RRR is slightly lower, applies to medium-sized banks, including joint-stock commercial banks and city commercial banks. The third tranche applies to small banks, which include rural credit cooperatives, rural cooperative banks, village banks and rural commercial banks operating and providing services to counties. "Two additional preferential treatments" refer to two preferential policies based on the three-tranches. First, first and second tranche banks that have met the evaluation criteria for the targeted RRR cuts for inclusive finance will be eligible for further RRR cuts of 0.5 percentage point or 1.5 percentage points. Second, for banks that operate and provide services to counties, when their local lending accounts for a certain proportion of the increment in their deposits, they will be eligible for a further RRR cut of 1 percentage point. And besides, the PBC also adjusted the criteria for assessing inclusive Micro and Small Businesses (MSBs) loans to expand coverage of the preferential policy on targeted reserve requirement ratio cuts for inclusive financing.

Second, the PBC established a preliminary policy interest-rate system including short-term policy rate which is OMO rate, mid-term policy rate which is MLF rate, and interest rate corridor, the ceiling of the corridor is SLF rate, and the bottom of the corridor is excessive reserve rate.

With recent reform, the PBC worked to improve the LPR formation mechanism among commercial banks and to have the LPR play a guiding role in the formation of real interest rates so as to improve the market-based interest-rate formation and transmission mechanism, which smoothed the transmission of policy rates to market rates and promoted a reduction in the real interest rates for the financing of enterprises. The quote is formed by adding a few basis points to the interest rate of open market operations, which mainly refers to the rate of Medium-term Lending Facility, or MLF, with a maturity of one year in most cases. In addition to the previous one-year maturity. The LPR will also cover the maturity longer than five years, which will serve as the pricing reference for bank's long-term loans such as housing mortgage, and facilitate a steady transition of outstanding long-term loan contracts with floating rates to the ones adopting LPR in the future.

Third, the PBC leverages targeted RRR reductions, central-bank lending, rediscounts, Pledged Supplementary Lending (PSL), Targeted MLF (TMLF) etc. to guide financial institutions to increase support for the key sectors and weak areas in the economy, such as MSBs and private firms.

Fourth, the PBC enhanced macro-prudential management and gave full play to the role of the macro-prudential assessment (MPA) in counter-cyclical adjustments and structural guidance.

Fifth, the exchange-rate regime reform has achieved great progress. The flexibility of exchange rate of RMB has been obviously increased, which is mainly driven by market forces. The RMB exchange rate fluctuated in both ways based on market supply and demand in reference to a basket of currencies and it was basically stable at a reasonable and equilibrium level.

Sixth, the PBC paid great attention to enhance the communication with public through a variety of channels, like press conferences, monetary policy reports, statements on PBC website, newspaper and official account of some popular social media, for example, Wechat and Weibo.

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Institutional framework

The primary objective of the Eurosystem is to maintain price stability. The Eurosystem, which consists of the ECB and the National Central Banks (NCBs) of the countries which have adopted the euro, defines and implements monetary policy for the euro area according to this objective. In 2021, the Governing Council of the ECB agreed to aim for a symmetric inflation target of 2% over the medium term.

To implement the decisions made by the Governing Council of the ECB on monetary policy in the euro area, the Eurosystem uses a range of instruments and procedures under its monetary policy implementation framework through which it steers very short term market rates close to its policy rate, the former being considered as the operational target of the monetary policy.

Key features of the monetary policy implementation framework

Under its operational framework, the Eurosystem conducts open market operations, offers standing facilities and requires credit institutions to hold minimum reserves on accounts with the NCBs. The operations are executed under uniform terms and conditions in all Member States whose currency is the euro. The actual implementation of the single monetary policy is made in a decentralised manner and conducted by the euro area NCBs

The monetary policy framework allows for the participation of all euro area credit institutions as defined in the Capital Requirements Regulation (CRR) under uniform eligibility criteria specified by the Eurosystem to ensure equal treatment across the euro area. Credit institutions are eligible as Eurosystem monetary policy counterparties if they fulfil the following criteria. They must be: i) located in the euro area (subsidiary or branch) and subject to minimum reserve requirements; ii) subject to harmonised EU/EEA-supervision or comparable third country regime; iii) financially sound; and iv) fulfil the operational criteria. Eligible counterparties may access the Eurosystem's standing facilities and participate in Eurosystem open market operations, which are based on tender procedures. Currently, there are around 2,050 eligible counterparties with access to standing facilities and about 1,800 with access to open market operations. As a rule, NCBs conduct the single monetary policy only with counterparties located or domiciled within their respective countries.

The Eurosystem uses open market operations for steering interest rates, managing the liquidity situation in the market and signalling the stance of monetary policy using either liquidity providing or absorbing operations.

Standard open market operations can be divided into four categories: (a) main refinancing operations (MROs) which are usually weekly reverse repo transactions; (b) standard longer-term refinancing operations (LTROs) which are offered every month with a 3-month maturity to provide longer-term refinancing to the banking sector; (c) fine-tuning operations, which can be executed on an ad hoc basis  to deal with liquidity fluctuations in the market and to steer interest rates; and (d) structural operations.  Structural operations, by means of outright transactions 1, reverse transactions or the issuance of ECB debt certificates, may be carried out whenever the structural position of the Eurosystem needs to be adjusted with regard to the financial sector. MROs and 3-month LTROs are currently being conducted as fixed rate tender procedures with full allotment (FRFA) and will continue to be conducted as FRFA for as long as necessary.

The standing facilities consist of the marginal lending facility (MLF) and the deposit facility (DF). Eligible counterparties may use the MLF to obtain overnight liquidity from the Eurosystem through a reverse transaction with their home NCB using eligible assets as collateral. There is no limit on the amount of liquidity that may be provided under the MLF, subject to eligible collateral availability. A negative balance on an eligible counterparty's settlement account at the end of a business day is automatically considered as a request for recourse to the MLF. Counterparties may use the DF to make overnight deposits with the Eurosystem through the home NCB, to which the DF rate shall be applied. There is no limit on the amount a counterparty can deposit under the DF. The interest rates on the two facilities form an interest rate corridor for short-term interbank money market rates among eligible counterparties and, together with the rate applied to MROs, signal the general stance of monetary policy.

The minimum reserve system pursues the aims of stabilising money market interest rates and potentially creating (or enlarging) a structural liquidity shortage. All credit institutions are subject to minimum reserve requirements (unless individual exemptions are provided on a case by case basis). The Eurosystem's minimum reserve system enables institutions to make use of averaging provisions, implying that compliance with reserve requirements is determined on the basis of the average of the end-of-calendar-day balances on the counterparties' reserve accounts over a maintenance period (around six to seven weeks). The reserve ratio, currently at 1%, is applied to banks' short-term liabilities (mainly deposits up to 2 years) and the remunerated reserves (at the MRO rate) are to be held on current accounts with the counterparties' home central bank. The excess reserves are remunerated at the lowest between the deposit facility rate (DFR) and 0%. The ECB might exempt, via the two-tier system for remunerating excess reserve holdings, part of the excess reserves held in reserve accounts with the Eurosystem from the DFR remuneration.

Pursuant to Article 18.1 of the Statute of the ESCB, all Eurosystem credit operations (i.e. liquidity-providing monetary policy operations and intraday credit) are conducted against adequate eligible collateral aimed at protecting the Eurosystem against financial losses in case of default of a counterparty. To ensure a smooth implementation of its monetary policy the Eurosystem accepts as collateral a wide range of marketable debt instruments and non-marketable assets. Eligible assets can be used across all credit operations as long as they fulfil transparent, uniform eligibility criteria specified and published by the Eurosystem. These are mainly based on the asset type, credit quality, listing market, the type of issuer, country of residence or incorporation or the currency of denomination. There are currently around 25,000 marketable assets eligible as collateral, which are published on a daily basis on the list of eligible marketable assets (Eligible Assets Database).

Every eligible collateral is subject to rules for the use of collateral (e.g. prohibiting close links between the collateral and the counterparty using it), specific valuation and risk control measures (primarily haircuts) that are calibrated for different asset classes to ensure compliance with the risk tolerance defined by the Eurosystem in a fashion neutral across issuer types and asset classes.

Due to the inherent flexibility in the monetary policy implementation, the Governing Council of the ECB may, at any time, change the instruments, conditions, criteria and procedures for the execution of Eurosystem operations.

Non-standard monetary policy measures

In response to the banking, financial and sovereign debt crisis, and the ensuing macroeconomic impact and risks for price stability, the ECB Governing Council has taken a series of non-standard monetary policy measures. These measures included the conduct of several rounds of longer-term refinancing operations with a maturity longer than three months, the conduct of three series of targeted longer-term refinancing operations (TLTROs) offering banks long-term funding at attractive rates, conditional upon the achievement of predefined lending targets, as well as several asset purchase programmes 2. As part of these measures, the collateral framework has also been (temporarily) expanded, foreign currency liquidity has been offered, and securities lending programmes were set up.

Moreover, since 2020, and to counter serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the coronavirus (COVID-19) outbreak, the ECB Governing Council has introduced additional outright purchases of securities under the Pandemic emergency purchase programme (PEPP) and unconditional reverse liquidity-providing transactions under the Pandemic emergency longer-term refinancing operations (PELTROs). In addition, it has eased the conditions of the third TLTRO series, complemented also by a package of further collateral easing measures.

With these tools, the Eurosystem seeks to fulfil its mandate through intermediary objectives going beyond the steering of the short-term money market. In the current environment of large excess liquidity, very short-term interest rates are anchored to the lower bound of the corridor and steered by the DFR. To support the bank-based transmission of monetary policy, while preserving the positive contribution of negative rates to the accommodative stance of monetary policy, the Eurosystem introduced a two-tier system for excess reserve remuneration, which exempts part of credit institutions' excess liquidity holdings (i.e. reserve holdings in excess of minimum reserve requirements) from negative remuneration.

Finally, the ECB has also provided forward guidance on the future path of the ECB's interest rate policy conditional on the outlook for price stability.

Institutional framework

The Basic Law of the Hong Kong Special Administrative Region of the People's Republic of China provides that the monetary and financial systems of Hong Kong shall be prescribed by law and the Government of Hong Kong shall, on its own, formulate monetary and financial policies.

The Financial Secretary shall be responsible for determining the monetary policy objective and the structure of the monetary system of Hong Kong. The Monetary Authority, who is the Chief Executive of the Hong Kong Monetary Authority (HKMA), shall on his/her own be responsible for achieving the monetary policy objective, including determining the strategy, instrument and operational means for doing so, and for maintaining the stability and integrity of the monetary system of Hong Kong.

The monetary policy objective of Hong Kong shall be currency stability, defined as a stable external exchange value of the currency of Hong Kong, in terms of its exchange rate in the foreign exchange market against the US dollar, at around HKD 7.80 to USD 1. The Exchange Fund Ordinance establishes the Exchange Fund under the control of the Financial Secretary. The Fund shall be used primarily for affecting the exchange value of the Hong Kong dollar.

Currency Board Arrangement

The structure of the monetary system, which is called the Linked Exchange Rate System (LERS), shall be characterised by Currency Board arrangements, requiring the Hong Kong dollar monetary base to be at least 100 per cent backed by, and changes in it to be 100 per cent matched by corresponding changes in, US dollar reserves held in the Exchange Fund at the fixed exchange rate of HKD 7.80 to USD 1.

Key features of the monetary policy implementation framework

The Monetary Base comprises: 1) Certificates of Indebtedness issued by the Financial Secretary, which provide full backing to the banknotes issued by the note-issuing banks in Hong Kong 2) Government-issued notes and coins in circulation 3) The Aggregate Balance, which is the sum of clearing account balances kept with the HKMA 4) Exchange Fund Bills and Notes issued by the HKMA on behalf of the Government.

A specific portion of the Exchange Fund assets has been allocated to back the Monetary Base. Under the LERS, while specific Exchange Fund assets have been designated for backing the Monetary Base, all Exchange Fund assets are available to support the Hong Kong dollar exchange rate. The stability of the Hong Kong dollar exchange rate is maintained through an automatic interest rate adjustment mechanism and the firm commitment by the HKMA to honour the Convertibility Undertakings (CUs).

When the demand for Hong Kong dollars is greater (or smaller) than the supply and the market exchange rate strengthens (or weakens) to the strong-side (or weak-side) CU of HKD 7.75 (or HKD 7.85) to USD 1, the HKMA stands ready to sell (or buy) Hong Kong dollars to (or from) banks for US dollars. The Aggregate Balance will then expand (or contract) to push down (or up) Hong Kong dollar interest rates, creating monetary conditions that move the Hong Kong dollar exchange rate away from the strong-side (or weak-side) limit to within the Convertibility Zone of HKD 7.75-7.85.

There are settlement facilities (Intraday Repo and Discount Window) through which banks can borrow Hong Kong dollar funds intraday or overnight from the HKMA through repurchase agreements using Exchange Fund Bills and Notes, which are fully backed by US dollar reserves, as collateral.

Institutional framework

The Reserve Bank of India Act, 1934, provides the legislative mandate to the Reserve Bank of India (RBI) to operate a modern monetary policy framework and, therefore, the RBI has adopted flexible inflation targeting (FIT) as the framework for monetary policy. The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. The Government of India, in consultation with RBI, sets the inflation target in terms of the Consumer Price Index (CPI) every five years (current target applicable from April 2021 to March 2026).

To achieve the objectives of monetary policy, the RBI uses an interest rate framework with the overnight call money market rate, measured by the weighted average call money rate (WACR), as the operating target. A Monetary Policy Committee (MPC), with the Governor of the RBI as its chairperson, determines the policy rate, i.e., the repo rate, required to achieve the mandated inflation target. The RBI endeavours to anchor the operating target, i.e., WACR, to the policy repo rate through the instruments available under monetary policy implementation framework.

A semi-annual Monetary Policy Report (MPR) is issued by the RBI, elucidating the macroeconomic framework, analysis of developments along with forecasts of inflation and output, liquidity conditions and financial market developments along with global environment and outlook.

Key features of the monetary policy implementation framework

The monetary policy framework aims at setting the policy repo rate at an appropriate level to achieve the monetary policy objectives based on an assessment of the current and evolving macroeconomic situation. Liquidity management is the operating procedure of monetary policy which envisages modulation of liquidity conditions, aimed at anchoring the WACR to the policy repo rate. Within its implementation framework, the RBI undertakes repurchase operations under Liquidity Adjustment Facility (LAF) and Open Market Operations involving outright sale and purchase of eligible securities, offers standing facilities and requires banks to hold minimum reserves in their current accounts with it. The current minimum reserve requirement has been set at 4 per cent of the net demand and time liabilities (NDTL) of banks and the reserves are held in the form of Cash Reserve Ratio (CRR) by banks in their current account with the RBI. These reserves are not remunerated. RBI allows limited averaging of reserves within the maintenance period, i.e., a fortnight, to allow banks to absorb liquidity shocks at their discretion and to help in stabilising short-term interest rates in the money markets.

Reverse-repo is a standing facility for deposit of funds by the eligible entities with the RBI. In addition, the RBI has provided standing lending facility viz., Marginal Standing Facility (MSF), which eligible entities can access to meet their overnight reserve requirements arising out of unforeseen frictional factors. The liquidity management corridor has the MSF rate as its upper bound (ceiling), currently 25 bps above the repo-rate and the fixed rate reverse repo rate as the lower bound (floor), which is 65 bps below the repo rate with the policy repo rate, which is set by MPC, in between. Thus, the MSF together with the fixed rate reverse repo rate constitute the corridor for overnight money market rates. To further strengthen the operating framework, an uncollateralised Standing Deposit Facility (SDF) has been notified but this is yet to be operationalised.

The Reserve Bank introduced the revised liquidity management framework in February 2020. As part of this framework, the RBI conducts a 14-day variable-rate term repo/ reverse repo as the main liquidity operation to coincide with the CRR maintenance cycle for managing frictional liquidity requirements. The main liquidity operation is supported by fine-tuning operations, overnight and/or of longer duration, to tide over any unanticipated liquidity changes during the reserve maintenance period. In addition, the Reserve Bank can conduct, if needed, longer-term variable rate repo/reverse repo operations of more than 14 days. Outright Open Market Operations (OMOs) and long-term FX swap auctions are conducted for supplying/withdrawing liquidity for longer duration to steer liquidity conditions consistent with the monetary policy objective. All the liquidity management operations of the RBI are collateralised by eligible collateral notified by the RBI from time to time.

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Institutional framework

The Bank of Japan Act states that the bank's monetary policy should be "aimed at achieving price stability, thereby contributing to the sound development of the national economy". The Bank set the "price stability target" at 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) in January 2013, and has made a commitment to achieving this target at the earliest possible time.

The basic stance for monetary policy is decided by the Policy Board at Monetary Policy Meetings (MPMs). At MPMs, the Policy Board discusses the economic and financial situation, decides the guideline for market operations and the Bank's monetary policy stance for the immediate future, and announces decisions immediately after the meeting concerned. Based on the guideline, the Bank sets the amount of daily market operations and chooses types of operational instruments, and provides and absorbs funds in the market.

The current policy framework, Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control, consists of two major components: the first is "yield curve control" in which the Bank controls short-term and long-term interest rates through market operations; and the second is an "inflation-overshooting commitment" in which the Bank commits itself to expanding the monetary base until the year-on-year rate of increase in the observed consumer price index exceeds the price stability target of 2 percent and stays above the target in a stable manner.

Key features of the monetary policy implementation framework

For policy implementation, the bank conducts the following measures in market operations.

The Bank adopts a three-tier system in which the outstanding balance of each financial institution's current account at the Bank is divided into three tiers, to which a positive interest rate (the basic balance), a zero interest rate (the macro add-on balance), or a negative interest rate is applied (the policy-rate balance), respectively. The interest rate applied to the policy-rate balance is regarded as the "short-term policy interest rate" and its level is to be decided at every MPM. The three-tier system encourages arbitrage trading at negative interest rates in money markets. Financial institutions have an incentive to ensure profit margins (reduce their policy-rate balances) by borrowing (lending) cash at interest rates that are lower (higher) than those applied according to their current account balances at the Bank and depositing funds in their current accounts at the Bank (supplying funds from their current accounts). The Bank reviews the "Benchmark Ratio Used to Calculate the Macro Add-on Balance" once every three months in principle to adjust the macro add-on balance and thereby the policy-rate balance to the appropriate levels.

The Bank offers outright purchases of T-Bills. The Bank decides the purchase size per auction considering the effects on financial markets.

The Bank purchases JGBs so that 10-year JGB yields would remain at around the "operating target for the long-term interest rate". While purchasing JGBs, the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices. With regard to the amount of JGBs to be purchased, the Bank conducts purchases in a flexible manner so that their amount outstanding will increase at an annual pace determined at the MPMs. In situations involving a rapid increase in the yields, the Bank would purchase JGBs promptly and appropriately.

The Bank purchases ETFs and J-REITs so that the amounts outstanding of its holdings will increase at annual paces in accordance with the guidelines decided at the MPMs. With a view to lowering risk premia of asset prices in an appropriate manner, the Bank may increase or decrease the amounts of purchases depending on market conditions.

The Bank purchases other assets, including CP and corporate bonds, in accordance with the guidelines for asset purchases decided at the MPMs. Also, the Bank conducts other operations, including the funds-supplying operations against pooled collateral, growth-supporting funding facility, stimulating bank lending facility, funds-supplying operation to support financial institutions in disaster areas, securities lending facility, US dollar funds-supplying operations, securities lending to provide JGSs as collateral for the US dollar funds-supplying, and the complementary lending facility.

Under QQE with Yield Curve Control, the Bank carefully examines the developments and functioning of financial markets as well as the impact of the Bank's operations on financial markets. Also, with a view to further deepening dialogue with market participants, the Bank conducts daily market monitoring and various market surveys and holds various meetings with market participants.

Institutional framework

The Bank of Korea Act stipulates the goal of monetary policy as follows: "The Bank shall contribute to the sound development of the national economy through ensuring price stability, while giving due consideration to financial stability in carrying out its monetary policy.

The Bank of Korea maintains a flexible inflation targeting system to effectively achieve price stability, which is the primary objective of monetary policy. The inflation target is currently set at 2.0% in terms of consumer price inflation (year-on-year). In ensuring price stability over the medium-term, the Bank pays careful attention to the impact of monetary policy on financial stability.

The Monetary Policy Board, the supreme policy-setting body of the Bank of Korea, deliberates and decides Korean monetary policy at the highest level. The Monetary Policy Board is made up of seven members, including the Governor and the Senior Deputy Governor of the Bank of Korea. The decisions made at its meetings are adopted through a simple majority with at least five members in attendance, unless otherwise specified. The meetings to determine the direction of monetary policy, mainly setting the Base Rate, are hosted eight times a year. After the meeting, a press release is made available and the Governor of the Bank of Korea holds a press conference to explain the details of and the background to the decision. The minutes detailing the discussions during the meeting are made public on the first Tuesday two weeks after the Board meeting.

Key features of the monetary policy implementation framework

The Bank of Korea adopts an interest rate-oriented monetary policy operation. Thus, the Bank determines its policy rate, the Bank of Korea Base Rate, and maintains the overnight call rate closely aligned with the policy rate using its policy instruments. The Base Rate is the reference rate applied in transactions such as RPs between the Bank of Korea and its financial institution counterparts, functioning both as the fixed rate for its sales of securities to absorb excess liquidity and as the minimum tender rate for its purchases to provide liquidity. The Bank uses open market operations, lending and deposit facilities, and a reserve requirement system as policy instruments.

The Bank of Korea predicts the supply of reserves, compares it with the demand for reserves, and calculates the amount of reserve surplus or deficit. If a deficit is expected, the Bank of Korea will inject liquidity, and if a surplus is expected, it will absorb liquidity. In this way, it conducts open market operations so that call rates do not deviate significantly from the Base Rate. The main instruments of open market operations include the issuance of Monetary Stabilisation Bonds (MSBs), transactions of securities, and deposits with the Monetary Stabilisation Account (MSA). MSBs have relatively long maturities. Thus, they are used as a major structural adjustment tool with long-lasting policy effects. Securities transactions are used to supply or withdraw funds by buying or selling government and public bonds. Eligible securities are confined to government bonds, government-guaranteed bonds, MSBs, and mortgage backed securities (MBSs) issued by the Korea Housing-Finance Corporation. However, if necessary, certain bonds specified by the Monetary Policy Board can be included. While securities transactions consist of outright transactions and RP transactions, most of them are RP transactions. The longest RP maturity is 91 days, but the majority of RP transactions involve seven-day RPs. The MSA, a term-based deposit facility, is one of the open market operation instruments that the Bank of Korea uses to control short-term liquidity.

Currently, the lending and deposit facilities at the Bank of Korea that are available to financial institutions consist of Liquidity Adjustment Loans and Deposits, the Bank Intermediated Lending Support Facility, Intraday Overdrafts, and Special Loans. Liquidity Adjustment Loans and Deposits, which are standing facilities, constrain excessive volatility of money market interest rates by enabling financial institutions to borrow shortage funds from the central bank or to deposit surplus funds at an interest rate level within a certain margin above or below the Base Rate. Interest rates applied to those facilities are the Bank of Korea Base Rate±100bp. Liquidity Adjustment Loans and Deposits carry overnight maturities. The Bank Intermediated Lending Support Facility is a lending system operated by the Bank of Korea to support financial institutions' lending to SMEs. The Bank of Korea provides low-interest rate funds, within certain ceilings, to financial institutions based on their performance in extending loans to SMEs. The interest rates for these programs are usually lower than the Base Rate and their maturities are one month. Intraday Overdrafts are facilities to extend financial support to banks experiencing transient shortages of settlement funds in the course of a day. They should be redeemed before the close of business that day. Special loans are those that the Bank of Korea extends as the lender of last resort in order to secure financial market stability, after obtaining special approval from the Monetary Policy Board. Their rates and maturities are determined in each case.

With regard to the reserve requirement system, the Bank of Korea Act stipulates that financial institutions hold a certain ratio of their liabilities subject to reserve requirements in their accounts with the central bank. The reserve requirement ratio on time deposits, time installment deposits, mutual installment savings for non-payment accounts, installments for home buying, and CDs is 2%, and that on other deposits is 7%. The reserve calculation period is from the first day to the last day of every month, and the reserve maintenance period is from the Thursday of the second week of the following month to the Wednesday of the second week of the month after the following month. In principle, no interest payments are made on reserve deposits with the central bank. However, if necessary, reserve deposits can be remunerated, as determined by the Monetary Policy Board.

Institutional framework

Guided by the Central Bank of Malaysia Act 2009 (CBA 2009) in promoting monetary stability, Bank Negara Malaysia pursues a monetary policy with the primary objective of maintaining price stability while providing a conducive environment for the sustainable growth of the Malaysian economy.

The Monetary Policy Committee (MPC) 1 , is responsible for formulating monetary policy and policies for the conduct of monetary policy operations. The MPC meets at least 6 times a year to deliberate on the appropriate level of the policy rate in safeguarding price stability while supporting economic activity. The Monetary Policy Statement (MPS) released after every MPC meeting is the main tool to communicate the policy decision.

The Bank uses the Overnight Policy Rate (OPR) as its key policy rate since April 2004 and it is the indicator of the Bank's monetary policy stance. The overnight rate is deemed to be an effective policy rate due to its minimal expectations content and high degree of controllability 2 . Under this framework, the OPR is effectively the target for the average overnight interbank rate (AOIR). In order to prevent excess volatility in the AOIR, the market rate is allowed to move within an interest rate corridor of ±25 basis points around the OPR set by the Bank.

Key features of the implementation framework

The Bank undertakes monetary policy operations to manage ringgit liquidity in the financial system, thereby ensuring that the operating target (AOIR) remains close to the OPR and the functioning of the interbank money market remains efficient.

Daily Market Operations

The Bank's monetary policy operations are conducted on a daily basis, which comprise both morning and evening sessions, executed via various combinations of monetary instruments. The operations are supported by the publications of liquidity forecasts (4 times daily) to communicate the intent of operations and changes to the level of liquidity throughout the day. Both liquidity forecasts and operations are announced and conducted via the Fully Automated System for Issuing/Tendering (FAST), a secure web-based system designed to facilitate the Bank's Open Market Operations (OMO) via tender or private placement basis, as well as primary issuances of ringgit (MYR) debt securities.

In the morning sessions, the Bank primarily uses uncollateralised direct borrowings to absorb liquidity from the banking system. These borrowings are auctioned on a competitive basis, and can have maturities ranging from overnight up to 6 months. The Bank can complement direct borrowings by conducting repo auctions of similar tenures which not only absorbs liquidity, but is also used to enhance liquidity in the secondary bond market.

The Bank may also issue central bank securities to absorb liquidity at longer maturities of up to 3 years, in the form of Bank Negara Monetary Notes (BNMNs) and Bank Negara Interbank Bills (BNIBs). Unlike BNMNs, BNIBs are only available and tradable between licensed banks and aim to enhance liquidity intermediation in the interbank money market. Foreign exchange (FX) swaps and outright sales and purchases of Malaysian Government Securities (MGS) are also part of the instrument toolkit to manage MYR liquidity in the banking system.

Towards the end of the day, the Bank conducts an overnight tender to mop-up any excess liquidity in the system, thus ensuring that the AOIR remains close to the OPR. In the event of residual surpluses or shortages following the completion of the overnight operations, the Bank makes available the overnight standing facilities, which sets a discount window of ± 25 basis points around the OPR. The Bank is able to borrow and lend at the floor and ceiling of the corridor respectively upon request by eligible institutions.

The counterparties for monetary policy operations, which comprise eligible onshore licensed banks (conventional, Islamic and investment banks), are able to participate directly in these operations, including standing facilities.

Statutory Reserve Requirement

The Bank also uses the Statutory Reserve Requirement (SRR) to manage liquidity, in which banking institutions are required to maintain cash balances in their Statutory Reserve Accounts equivalent to a certain proportion of their eligible liabilities – this proportion being the SRR rate. The SRR may be raised to manage the significant build-up of liquidity, which may result in financial imbalances and create risks to financial stability. Conversely, the Bank may lower the SRR if necessary, to support the transmission of monetary policy rates to retail rates. However, it is important to note that changes to SRR should not be construed as a signal on the stance of monetary policy, whereby the OPR is the sole indicator.

The current SRR has been lowered from 3.00% to 2.00% since 19th March 2020, and in addition, the Bank has provided temporary flexibility for all banking institutions to use long term government securities to meet the SRR compliance until 31 December 2022. The flexibility is part of the Bank's continuous efforts to ensure sufficient liquidity to support financial intermediation activities during the COVID-19 pandemic.

Islamic money market operations

Malaysia is unique in having a dual banking system, where both conventional and Islamic systems operate in parallel to provide financial products and services that could meet the diverse demands of customers. Liquidity in both systems are linked by customer transfer payments, as well as the participation of conventional banking institutions in the subscription and trading of Islamic banking instruments. The primary objective of Islamic money market operations is to ensure sufficient liquidity for the efficient functioning of the Islamic interbank market.

The Bank manages liquidity in the Islamic interbank market through the use of Shariah-compliant instruments, the main instruments being the Qard acceptance (loan) and Commodity Murabahah Programme. Both instruments are used to absorb liquidity with short maturities. For longer-term liquidity management, the Bank issues central bank securities such as Bank Negara Monetary Notes-i (BNMN-i) and Bank Negara Interbank Bills-I (BNIB-i) which are structured based on Islamic principles.

Institutional framework

The Mexican Constitution determines, in Article 28, that the State "shall have a Central Bank, whose primary objective shall be to attain the stability of the purchasing power of the national currency". Moreover, Bank of Mexico's Law establishes that " Bank of Mexico's purpose shall be to provide the country's economy with domestic currency. In pursuing this purpose, its primary objective shall be to seek the stability of the purchasing power of said currency." However, the Law also gives the Bank of Mexico additional objectives, such as "promoting the sound development of the financial system and fostering the proper functioning of payment systems."

The same Law establishes that the Board of Governors has, among its attributions, "the power to establish the Bank's operational policies and guidelines and determine the characteristics of those transactions". Therefore, the Board of Governors is the solely responsible for the decision making process related to monetary policy.

Key features of the monetary policy implementation framework

The key policy rate in Mexico is determined as the Overnight Interbank Funding Rate, which has been used since 21 January 2008. On a daily basis, the Bank of Mexico provides or withdraws liquidity to the system through Open Market Operations performed by the Domestic Operations Department, in order to guarantee that short-term rates remain near the target rate. The amount of daily interventions is determined based on the variations of autonomous factors, aiming for a daily balance of zero in the banks aggregate accounts within the Bank of Mexico at the end of each day.

Every day, the Bank of Mexico executes short-term Open Market Operations, through repos or deposits, in order to manage the liquidity in the system and provide money market participants with certainty regarding their liquidity needs, assuring that the Bank will satisfy their demand. This credibility contributes to provide stability in money markets, leading market participants to engage in funding operations at a similar rate to the target rate.

In addition, whenever the Bank of Mexico needs to sterilise liquidity for longer periods of time, it also uses medium or long-term Open Market Operations through outright sell or exchange auctions of government securities such as FRNs and zero-coupon bonds. These operations are carried either through scheduled weekly auctions or in the form of extraordinary auctions 1. Furthermore, the Bank of Mexico has other available instruments in its toolkit, such as Monetary Regulation Deposits (MRDs). MRDs are set indefinitely for a fixed amount based on a percentage of banks´ liabilities at a determined point in time. In particular, a percentage of MRDs can be held in the form of debt instruments called Monetary Regulation Bonds (BREMS R) issued by the Bank of Mexico. These securities are non-negotiable in secondary markets and can only be used as repo collateral with the Central Bank and/or with commercial and development banks.

Finally, the Bank of Mexico also has other instruments within its operational framework, such as standing facilities (lending and deposit) to satisfy end of day needs from banks. The lending facility provides the required overnight funds to banks that ask for end-of-day liquidity; however, the use of this facility is penalised with by charging twice the target rate (and in a symmetric way, deposits constituted within the Central Bank are remunerated at zero). The reason behind the width of the aforementioned corridor is to create conditions that incentivise market participants to compensate liquidity excesses or shortages between themselves, and not with the Bank of Mexico.

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