1) Factors influencing trading and interest rate development on the money market
2) The continuing inflow of foreign capital increases the liquidity of commercial banks
3) The focus of trading shifts to trades between commercial banks
4) The CNB had to continue to sterilise the inflow of resources from abroad
5) CNB and T-bills issues increase
6) Interest rates on CNB, NPF and T-bills are below the discount rate
7) Essentially, only small commercial banks are refinanced
8) Refinancing takes the form of discounted bills
9) Interest rates on the MDT decline until June, then increase
10) Interest rates on short-term credits record greater volatility
11) Interest rates fall on newly granted credits
1) Money market developments during the first nine months of this year were affected mainly by the following factors:
- a lasting increase in the inflow of foreign capital
- continuing overall high demand for loans by commercial banks clients
- lasting uneven allocation of depository resources in the banking system (major commercial banks are the dominant holders of the non-banking sector's primary deposits).
- further measures by the CNB and commercial banks directed towards ensuring more effective management of liquidity in the banking sector and thus on the money market.
2) With regard to the monetary impacts and demands on routine management of monetary development, the growing inflow of foreign capital can be considered the key item in the list of basic factors given above. The increase in foreign capital inflow and its influence on the liquidity of commercial banks is indirectly confirmed by higher sales volume in forex fixing where monthly purchases of foreign exchange means ranged from CZK 8 to 9 bn.
3) This trend in foreign fund inflow was one of the main factors in the increase in trading volume on the money market and the subsequent shift in the focus of trades on money market into the area of transactions among commercial banks. A lower quantity of refinancing of commercial banks by the CNB, given the sufficient liquidity in the banking sector, contributed to this movement. The most active banks on the money market were thus major commercial banks with the greatest increase in foreign exchange resources and domestic primary deposits.
4) In the interest of maintaining the development of monetary aggregate M2 within the set limits under the given conditions, the CNB had to continue to sterilise the increased inflow of foreign resources throughout the entire period under review. As in the previous year, the sterilisation of free liquidity was carried out through the issue of CNB bills, T-bills (SPP) and free market operations with these securities. The issue of these securities proceeded under the joint issue programme of the Ministry of Finance, the Czech National Bank and the National Property Fund.
5) In line with this schedule, issues of T-bills were gradually increased by CZK 5 bn in Q1, by CZK 2 bn in Q2 and CZK 1 bn in Q3, so that at the close-September they amounted to CZK 31 bn. This growth trend in the volume of CNB bills issued was faster, given the increasing foreign resources inflow. In Q1, the increase in their volume reached CZK 22 bn; in Q2 issues increased by another CZK 15 bn and in Q3 by a further CZK 10 bn, thus totalling CZK 85 bn. However, on the other hand, this growing amount of CNB bills, with the aim indicated above, negatively influenced the CNB costs and the result of its overall performance. The volume of NPF bills issued remained stable, CZK 16 bn. The total increase in short-term securities in circulation thus amounted to CZK 55 bn.
6) Interest rates attained in auctions of these short-term securities, due to their minimal risk, ranged generally below the discount rate with a moderate downward trend in the first half, and a slight increase since July. This trend reflected the overall development of liquidity and interest rates on the inter-bank deposit market. Interest rates on T-bills with maturity of up to one month ranged from 6.52 to 5.53%, for one-month bills from 8.20 to 7.40%. The difference in interest rates is due to SPP exemption from taxation.
In 1994, free market operations with these securities act as a basic instrument for the management of banking system liquidity, and are used to intervene in the development of interest rates on the inter-bank money market. The CNB uses several instruments for free market operations. They are as follows:
- the outright purchase and sale of securities were used in larger volumes and more frequently up to mid-August this year. The CNB in this period functioned as a market maker on the short-term securities market. It continuously announced prices for the purchase and sale of T-bills, CNB and NPF bills. This CNB role ensured 100% liquidity of the above mentioned instruments and positively contributed to money market development, supported holdings of these instruments by banks and enabled banks to observe the set level of MRR as precisely as possible.
- both-sided repo operations. They were, throughout the entire monitored period, used in the form of tenders and individual operations, and gradually assumed the role of the main instrument of liquidity management through free market operations. In the first half of this year, the percentage increased of financing the auction credit through short-term securities, and since June liquidity has been fully provided through repo-operations. The maturity of repo-tenders was from one to seven days, while individual repo maturity was mostly one day.
The cancellation of the quotation of purchase prices eliminated an automatic source of drawing liquidity from the CNB according to the needs of individual banks, and was replaced by a system of regular repo-operations, or reverse repo-tenders with maturity of 3 to 4 days. These operations are supplemented by overnight repo operations in order to fine-tune fluctuations in the development of banks reserves and interest rates on the inter-bank market.
7) Refinancing credits were extended almost exclusively in the form of re-discounted trade bills. The volume of refinancing credit provided in this form showed only a very moderate growth trend, although it was provided at a discount (average amounts in various months ranged from CZK 5.3 bn to CZK 6.9 bn). The cause can be seen particularly in CNB monetary intentions (stricter conditions of bill trades and the introduction of contingents for banks with a large volume of these credits) and partially in the level of interest rates on the interbank deposit market.
8) Refinancing has also taken place, albeit to a very small extent so far, in the form of discounted export bills (CZK 0.7 bn as of 30.09.94). Auction refinancing credits were provided only for a very short time in January in the form of an overnight credit to address a structural insufficiency of funds of a very small groups of banks (CZK 0.1 bn to CZK 3 bn at an interest rate of 9.0 - 9.75%). Likewise, the possibility of drawing Lombard credit was virtually unused. Only in three cases did the CNB provide the so called "last resort credit". This involved commercial banks facing liquidity problems.
The problems which arose in the functioning of three commercial banks and the inflow of foreign funds to the benefit of major banks further strengthened these major banks' position on the interbank deposit market (MDT) as a dominant creditor´s subject with respect to small commercial banks. With respect to interest rate development, however, this factor was not significant, as the factor of liquidity growth due to increasing foreign resources regulated by CNB operations on this market acted here at the same time.
9) The resulting trend of interest rates on the inter-bank deposit market moved generally downward until June. In contrast, since July, interest rates have been gradually increasing, due, among other things, to the withdrawal of CZK 10 bn from the banking sector through an MRR increase and the CNB more intensive effort to sterilise capital inflow through market operations. This development is illustrated in the graph of interest rate development on the interbank deposit market on page 40 of this report.
10) While interest rates with longer maturity showed no significant fluctuations, with respect to short-term interest rates the graph indicates greater volatility throughout the entire period under review. The cause can be seen not only in the nature and use of shorter-term funds, but also in the reduction of the time period for balancing the minimum reserves requirement to 14 days.
11) The development of interest rates on the interbank deposit market and growing competition from foreign banks on the domestic market, manifested in increased credit issue at lower interest rates were also main factors influencing the falling trend of interest rates on newly granted credits. While the average interest rate on newly granted credits was 14.6% in December 1993, it fell to 12.4% by June and in September again slightly increased to 13.4%.