Elements
Element 1 summarises the main institutional features of monetary policy decisions in currency areas represented on the Markets Committee. It summarises which body is responsible for policy decisions, details about its composition, key parts of the mandate, and the nature of the decision making process (eg whether decisions are made by a consensus or determined by a majority of vote). Element 1 further indicates the frequency of policy meetings and public announcements of policy decisions. The last column of the element reports information about the main policy target (oftentimes a particular short-term interest rate, and in some cases, a specific macroeconomic target such as a certain level of inflation).
Monetary policy operating frameworks comprise several components and key features, including an operational target and the tools and procedures used to achieve it. Element 2 provides an overview of key features in each operating framework, followed by more detailed presentations on various components in the following elements.
Communication is an important tool used by central bankers to shape expectations, which can help central banks achieve macroeconomic objectives. Additionally, communication can be viewed as a mechanism to hold independent central banks accountable for their activities. Element 3 summarises the extent of monetary policy communications, including details about: i) the explicit use of forward guidance, ii) the timing and distribution of a policy announcement, iii) the policy announcement and documents, iv) communication explaining policy decisions, v) the dissemination of minutes, vi) content of minutes, vii) publication of forecasts, and viii) publication of projected path of policy rate.
Many central banks impose reserves requirements, which oblige financial institutions to hold a minimum percentage or amount in reserve against specified deposit liabilities as deposits with their central bank. Central banks may use reserve requirements for liquidity management purposes, monetary control and/or to support the functioning of the payments system. The required reserve ratio can vary by the maturity and by the currency of the reservable liabilities. Element 4 summarises the ratios and size of the reserve requirements.
Central banks differ in the ways in which reserve requirements are implemented. Element 5 summarises the main features of reserve requirements: i) the length of the maintenance period (ie period for which reserve requirements are set), ii) the length of the calculation period (ie period for which reservable liabilities are used to calculate required reserves), iii) the lag between the calculation period and its associated maintenance period, iv) whether financial institutions need to fulfil requirements on a daily basis or whether averaging over a maintenance period is allowed, v) whether institutions are allowed to carry over some excess or deficiency of reserves to the following maintenance period, vi) whether institutions are allowed to use vault cash to fulfil reserve requirements, and vii) the remuneration on required reserves (average and marginal rate).
A central bank can manage the liquidity position of the financial system by altering its balance sheet size and composition. Forecasting liquidity involves projecting the evolution of the balance sheet of the central bank. This may combine forecasts of the various autonomous factors (ie liquidity factors that do not normally stem from the use of monetary policy instruments) driving the changes in liquidity (eg changes in autonomous factors such as balances held by the Government with the central bank or fluctuations demand for reserves).
Element 6 presents the current liquidity position in each jurisdiction, and details on the central bank's forecast – including whether the liquidity forecast is made public (for details on published forecasts see Element 12). The element also lists which autonomous factors are more volatile or unpredictable in each individual economy.
The lending side in the standing facility – ie the market rate ceiling in an interest rate corridor – is collateralised marginal lending with a short maturity, often overnight; in a few cases, the maturity is up to 1 week and 1 month. Lending facilities enable counterparties to obtain short-term liquidity from the central bank for liquidity management. The pre-specified interest rate on the facility also helps to contain market rates among counterparties with access to the central bank. The interest rate ceiling is created since little incentive exists for the counterparty to borrow from the market at a rate higher than that demanded by the central bank.
Element 7a presents key characteristics of central bank standing lending facilities including: i) the name of the facility, ii) the form of the facility (ie repo, collateralised lending), iii) the pricing method, iv) the maturity of the facility terms, v) counterparty access, and vi) the facility's function(s)/objective(s).
Many central banks maintain standing deposit facilities with short maturities – often overnight – which provide payment of interest on deposits. A standing deposit facility generally serves as a floor on interest rates: If a counterparty can earn interest on the deposits it holds at the central bank, then given the safety and convenience of this investment, little incentive exists for the counterparty to lend at a rate lower than that offered by the central bank. Further, if the counterparty can acquire funds in the wholesale market at rates below the rate paid on reserves, competition for these funds to earn an arbitrage profit would suggest that the counterparty will bid up these rates close to the interest rate on deposits/reserves. As a result, the deposit rate generally acts as a floor for short-term interest rates.
Element 7b presents key characteristics of central bank standing deposit / market floor facilities including: i) the name of the facility, ii) the form of the facility (ie deposit, reverse repurchase agreement), iii) the pricing method, iv) the maturity of the facility terms, v) counterparty access, and vi) the facility's function(s)/objective(s).
Open market operations could take different forms depending on the economic environment and counterparties' structural liquidity position towards the central bank. Element 8a presents details regarding two standard open market operations: repurchase agreements (RP) or reverse repurchase agreements (RRP). An RP is a liquidity-providing transaction initiated by the central bank with the aim to provide liquidity against collateral which is then returned for a slightly higher price (which reflects the borrowing rate). An RRP is typically a liquidity-absorbing instrument initiated by the central bank with the aim to drain liquidity by agreeing to sell an asset to a counterparty who simultaneously agrees to re-sell the asset back to the central bank for an agreed price (reflecting the interest rate) after a stated time.
Central bank bills are unsecured debt securities issued by the central bank for monetary policy implementation. Issuing central bank bills drains excess liquidity in the banking system, and thus influences market interest rates. Central banks may also issue bills to support liquidity by supplying high-quality debt that can be used for trading, investment and hedging purposes. Authorised institutions may also use holdings of central bank bills to borrow currency via the central bank's discount window.
Element 8b shows features of the tool, including the range of maturities, allocation mechanisms, and eligible counterparties. Note that the element only includes information on central bank bills, and central banks could use treasury bills to manage liquidity.
Foreign exchange swaps are a contract between two parties to exchange one currency for another, and then reverse that transaction later at a specific future date. Central banks generally use FX swaps to manage domestic liquidity, implement monetary policy, manage foreign exchange reserves, and to stimulate domestic financial markets.
Element 8c details the maturity of FX swap contracts used, if any, and the pricing methods. FX swaps can often be used on a case-by-case basis, eg as part of temporary measures to ease foreign currency shortages during times of financial market stress.
Besides the open market operations listed in element 8, central banks can also manage liquidity using tools such as outright transactions, direct borrowing, and direct lending. Central banks may use these operations to affect market liquidity, to provide monetary policy accommodation, and/or to improve market functioning. Element 9 summarises the form, frequency, maturity, pricing method, counterparty access, and functions of these type of operations.
Central banks play a critical role in maintaining an economy's payment infrastructure by operating systems used to settle generally large-value interbank funds and securities transfers. Central bank intra-day liquidity facilities are designed to help ensure the smooth functioning of payment, clearing, and settlement activities that occur in the financial system by temporarily extending credit to institutions that have insufficient funds to meet payment obligations during the day.
Element 10 presents information about: i) the settlement system over which payments occur, ii) the type of intra-day liquidity facility, iii) the charge for central bank extension of intra-day credit, iv) whether the central bank has a foreign currency settlement system, v) whether the country's banks participate in the CLS (Continuous Linked Settlement) bank, and vi) any other settlement systems operated by the central bank.
Central bank's credit operations often include collateralised lending to central bank counterparties. This approach is designed to protect central banks from financial risk. Element 11 summarises which assets are deemed eligible as collateral in various central bank credit operations, as well as the difference in the types of collateral used to secure loans from standing facilities (see Element 7) and in open market operations (see Element 8).
As explained in Element 6 above, forecasting liquidity involves projecting the evolution of the balance sheet of the central bank. Publishing liquidity forecasts may allow individual institutions to better judge their own liquidity position relative to the overall supply and demand in the market, and estimate the likely amount of open market operations.
Element 12 lists some of the channels central banks use to publish forecasts. The ex-ante publication of forecasts can be combined with ex-post publication of operations (see Element 13).
Central banks often provide ex-post transparency into open market operations, including information about the volume and price of the transactions, as well as disclosures about the central bank's security holdings. The optimal degree of central bank transparency is influenced by the market context in which the central bank operates; in some cases, "too much" transparency can contribute to market dysfunction by facilitating market segmentation or manipulation. Some central banks provide ex-ante transparency into open market operations, including details about operational calendars, security types, maturities, and purchase amounts in advance, especially when auctions are the primary method of purchase. This approach presents key trade-offs between certainty and flexibility. Ex-ante transparency could potentially lead to less volatility and more efficient monetary policy transmission; however, it could also reduce central bank flexibility and discretion in conducting open market operations.
Element 13 shows: i) whether the volume and price of central bank open market transactions are published, ii) through which channel(s) operational information is disseminated, and iii) the timing of the release of operational information.
Disseminating information on central bank operations, including the use of standing facilities, is an important feature in informing external stakeholders about central bank transactions. However, reporting central bank lending (and deposit) activity should avoid creating market dysfunction, for example through stigma effects. Element 14 presents the channel(s) the central bank uses to inform the public on lending and deposit activity and its timing.
Besides information on the liquidity forecast (Element 12), open market operations (Element 13), and standing facilities (Element 14), some central banks disseminate additional information related to their monetary policy operating procedures, such as information on the amount of FX interventions. Element 15 summarises the main types of other information disseminated, the channels and the timing.