The level of interest rates on the money market in the Czech Republic is predetermined by the development of interest rates in two its basic segments: the interbank deposit market and the short-term bond market.
On the short-term bond market the CNB has dropped its role as a market-maker and the new official market makers will be the four major Czech banks (Komercni banka, Ceskoslovenska obchodni banka, Ceska sporitelna and Investicni a Postovni banka). In line with this strategy, the CNB first ceased quoting the bid price and reduced the volume limits for selling bills and, effective 14 September, stopped publishing its quotations and the reference yield curve. This curve was gradually losing significance and this is why the CNB has used a market yield curve since October derived from quotations of the above market makers. Official publishing of this curve is planned from the time when these banks are granted the status of acknowledged market makers. Since 5 December, the CNB has stopped determining its own reference yield curve and quoting sale prices. Henceforth, the CNB will conduct direct trades only with the market makers on the basis of market prices. Market prices are also the basis for determining yield limits in bill auctions.
In September, in accordance with monetary policy intentions and following agreement with the CR Ministry of Finance, a change was made in the maturity structure of T-bills and CNB bills. The MF changed standard maturities of 4 and 12 weeks to 13, 26, 39 and 52 weeks and of CNB bills to 13 and 26 weeks.
Although the turnover on the short-term bond market is gradually increasing, it is far from this on the deposit market. At the same time, however, the number of participants is growing, coming from, besides banks, the ranks of financial institutions (funds, insurance companies), large enterprises and security traders. Foreign investors are also making use of high yields (usually they are not subject to the 25% withdrawing tax) and low risk (stable exchange rate) by investing in National Property Fund (NPF) bills.
The CNB influences the level of interest rates through its monetary policy measures. On 4 August, the CNB increased the percentage rate for the minimum reserves requirement which banks are obliged to maintain without interest (3% on time deposits and 12% on demand deposits). The CNB increased the discount rate from 8% to 8.50% on 24 October and the Lombard rate from 11% to 11.50% on 2 December. A less obvious, but very significant measure consisted in defining more precisely the operational objective of the monetary policy, i.e. control over the amount of reserves of the banking sector. For this reason, the CNB has been, since August, influencing the amount of the banks' reserves by daily interventions to keep it in harmony with the monetary program.
The CNB monitors both the development of interest rates (PRIBOR and PRIBID) and the turnover on this market. Reference interest curves are calculated on the basis of quotations of 10 reference banks at 11 a.m. During the entire six months the reference banks were Bayerische Vereinsbank, BNP-Dresdner, Citibank, Creditanstalt, Credit Lyonnais, CSOB, Investicni a Postovni banka, Komercni banka and Zivnostenska banka. Until 9 October, the tenth reference bank was Agrobanka which was replaced by Ceska sporitelna on 10 October. The improvement and development of the interbank market is confirmed by both reduction of the spread (from 0.9% in June to 0.75-0.80% in December) and the volume of traded interbank deposits which continues to grow steadily (from CZK 132.3 bn in June to CZK 213.7 bn in November, and CZK 265.4 bn in December).
The development of PRIBOR for maturities of 1W, 1M, 6M and 1Y in 1994 is shown in the graph which illustrates the impact of the central bank policy on the amount of short-term rates. The money supply growth at the beginning of the year did not demand any significant correction and steady large surpluses of banks on MRR accounts entailed a gradual reduction of rates. Due to an increased rate of growth in the money supply in the 2nd half, the CNB had to apply stricter policies on the money market. The MRR increase in August, the termination of the function of a market maker on the short-term bond market also in August, the increase of the discount rate in October and the Lombard rate in December and particularly the constant pressure on reducing the banks' free reserves entailed a permanent growth in rates in the 2nd half up to 11% - 12% for O/N, and 12% - 13% for longer maturities.
For foreign investors, the difference is significant in interbank deposit interest rates (PRIBOR) on CZK in comparison with rates on DEM and USD. With a fixed CZK linkage to the basket of these currencies (approximately in a 2:1 ratio) it is, therefore, purposeful to monitor the synthetic curve, created in this way, of interest rates on this basket. The graph shows that the difference of this "synthetic" interest curve was below the real CZK yield curve at the end of July by 3.57% for short maturities and by 3.21% for long maturities. At the end of December, the differential further increased to 7.16% and 6.35% for monthly and annual maturities respectively. Due to this, the possibility of using short-term instruments for investment in the Czech Republic increased significantly, thereby helping to increase the inflow of foreign capital into the Czech Republic.