## 1blrea2020004 - Preface ## Source details **Canonical URL:** [1blrea2020004 - Preface](https://www.imf.org/-/media/files/publications/cr/2020/english/1blrea2020004.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1blrea2020004.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1blrea2020004.pdf.json) --- ### Mission scope and participants - Mission: follow-up MCM TA mission to the National Bank of the Republic of Belarus (NBRB), Minsk, November 11–20, 2019. - Mission team: Mr. Nils Maehle (IMF, MCM Department) and Mr. Karel Musil (external expert, Czech National Bank). - Objectives: - Assess progress from earlier eight missions and two in-country customized training events in the first phase of the “Building Capacity in Monetary Policy Modeling and Analysis” project (SIDA-funded). - Initiate the second phase of the project lasting until end-2020 focusing on sectoral analysis and near-term forecasting (NTF) tools. - Assess internal and external communication. - Discuss enhancing the foreign exchange intervention framework. - Discuss improvements and plans for liquidity forecasting and interbank money market operations to align short-term market interest rates with the policy rate. - NBRB counterparts met: Mr. Dmitry Kalechits; Mr. Dmitry Murin; Ms. Zhanna Snopkova; Mr. Andrey Golodushko; Ms. Natalia Mironchik; Mr. Denis Goregliad; Mr. Dmitry Ostanin; Mr. Dmitry Vanitskiy; Mr. Sergey Salak; other senior officials and staff. ### Executive summary — key findings - FPAS integration and staff capacity: - The FPAS and model-based forecasts/policy analysis are now well integrated into the policy-making process. - Staff are well trained and experienced with the tools developed; the forecasting unit expanded with several newly recruited young economists. - The quarterly full model-based forecasting and policy decision rounds have become routine and a key input to decision making. - Additional less formal interaction between staff and board members between formal meetings may further enhance the process. - Internal and external communication: - Internal board presentations: well focused and technically solid, but medium-term forecasts presented as mechanical extrapolation rather than policy-driven outcomes. - External monetary policy statements: similar weakness; could benefit from streamlining, sharper focus, and simplification for non-expert audiences. - Monetary policy framework: - De facto framework is close to inflation targeting (IT lite) but has three main weaknesses: - (i) the inflation target is revised annually; - (ii) the target is not continuous but for the end-of-year inflation rate; - (iii) the target is set as a ceiling (current target: keep inflation below 5 percent at end-2019) while technically treated as a point target, leaving no buffer against unpredictable shocks. - Recommendation: replace current end-of-year inflation ceiling with a continuous medium-term point inflation target to improve communications, better anchor expectations, and provide flexibility to respond to temporary shocks. - Moving to a continuous medium-term target requires being allowed to publish forecasts and a more transparent forward-looking external communication. - Near-term forecasting and sectoral analysis: - Current setup for sectoral analysis, nowcasting, and NTF is technically sophisticated and detailed but somewhat too mechanical; univariate time-series models (e.g., ARIMA) may be pulled by recent outliers and miss trend-cycle changes. - A more structural approach that incorporates expert judgment and known developments often yields more accurate near-term forecasts, especially during large shocks or structural changes. - Foreign exchange (FX) interventions: - NBRB FX operations may not be fully consistent with the published intervention framework because of reserve accumulation needs; this can cause market confusion about NBRB intentions and volatility tolerance. - Recommendation: align modality of FX market operations with their purpose to avoid sending conflicting signals and to enhance the impact of interventions addressing disorderly market conditions and excessive exchange rate volatility. - Liquidity forecasting and interbank market operations: - The current interest-rate focused fixed-rate full-allotment implementation framework is working reasonably well. - The recently introduced overnight open market operation on the last day of the reserve maintenance period (RMP) should help address interbank rates falling below the policy rate on the last day of the RMP, but should ideally be conducted at the end of the trading day and not in the morning or middle of the day. - The tendency for interbank rate to be above the policy rate during the earlier part of the RMP is due to a few trades by some smaller less creditworthy banks that are structurally short and face a large counterpart risk premium; these may not be material. - Recommendation: develop a secured interbank market (including FX exchange swap or FX repo) and ensure banks understand the operating framework, that seven-day securities are issued at the policy rate, and that NBRB is committed to fully satisfying demand in the quantity tender. ### Table 1 — Key recommendations (as presented) - Replace the current end-of-year inflation target with a continuous medium-term inflation target. - Timing: Medium Term - Priority: 1 - Increasing the quality of the external communication documents, including particularly their English version. - Timing: Short Term - Priority: 1 - Further improve the NTF tools and introduce structural models that facilitate more of a story-telling approach. - Timing: Medium Term - Priority: 3 - Comments: Gradual process. Further technical assistance to help with this is planned under this project. - Further enhance the internal board presentations along the lines discussed. - Timing: Short Term - Priority: 3 - Aligning the modality of the FX market operations with their intended purpose. - Timing: Medium Term - Priority: 4 - Conduct the newly introduced overnight open market operation at the end of the trading day and not in the morning or middle of the trading day of the last day of the reserve maintenance period. - Timing: Medium Term - Priority: 3 - Ensure that banks properly understand the NBRB’s operating framework for keeping short-term market interest rates aligned with the policy rate, including that the seven-day securities are issued at the policy rate and that the NBRB is committed to fully satisfy the demand in this quantity tender. - Priority: 2 Notes: - The timing horizon for the short-term period is understood to be up to two quarters, the medium-term horizon is three to six quarters. - The prioritization ranks the action from the most important (1) to the least important (4). ### I. Progress during the Monetary Policy Modeling Capacity Project — highlights - FPAS and QPM: - The Quarterly Projection Model (QPM) is the core medium-term policy analysis model at the center of the FPAS and is being used routinely. - Staff and process: - Staff are trained and experienced; forecasting and decision-making process is well structured and increased two-way interaction with the NBRB board. - Communication and framing: - Internal and external documents tended to describe the monetary policy stance as "neutral," consistent with NBRB’s current estimate of a 4–5 percent real equilibrium interest rate, but this framing may not help change public perception or anchor inflation expectations. - Recommendation reiterated: - Replace end-of-year inflation ceiling with a continuous medium-term inflation target (example formulation: keeping inflation around 5 percent over the medium term); requires permission to publish forecasts and more transparent forward-looking external communication. ### II. Enhancing near-term forecasting, sectoral analysis, and forecast disaggregation tools — actions and cautions - Limitations of current methods: - Univariate time-series (ARIMA, factor models) are useful but can be overly mechanical and sensitive to outliers; separating outliers from trend-cycle changes is critical. - Recommended enhancements by component: - Inflation: - Supplement current ARIMA and factor models with more structural short-term models and expert judgment, possibly at a more aggregated level. - Real GDP: - Move from aggregate time-series toward a more structural and detailed approach based on main supply and demand side GDP components to build a more detailed nowcast and near-term forecast story. - Nominal wages: - Use a story-telling approach; deeper analysis of tariff and bonus components of private sector wages; establish links between wage and productivity dynamics and passthrough from government to private sector wages. - Fiscal analysis: - Progress in enhancing fiscal policy analyses and calculating the fiscal impulse is encouraging; an iterative process between fiscal experts and the QPM team is needed to properly estimate the fiscal impulse. - Recursive macroeconomic model: - The newly developed recursive macroeconomic model can support a more structured near-term forecasting approach and disaggregation of QPM output but may require simplification and reformulation; error-correction models have good near-term forecasting properties but are not suitable for forward-looking medium-term policy analysis as they lack an explicit role for policy. - Disaggregation level: - Current high level of output disaggregation (legacy financial programming approach) is resource intensive, may produce projections of questionable quality and limited analytical value, and can distract policymakers; the right balance of detail is required. - Project phase 2: - The planned one-year second phase will aim to help NBRB staff enhance these tools along the lines outlined above. ### III. Enhancing internal and external communication — actionable guidance - General goal: sharpen policy message, increase prominence of price stability objective and role of monetary policy. - Internal presentations: - Highlight main forecast messages; remove distracting details; present medium-term forecasts as policy-driven outcomes rather than mechanical extrapolations. - External communication: - Streamline and sharpen focus of press releases and Chairman’s monetary policy statement; simplify language for press and non-expert audiences. - Use headlines, topical sentences, and single-sound bite sentences to increase pickup by the press. - Adopt a top-down drafting approach with topical sentences highlighting core messages followed by elaboration. - English and Russian texts: - The English versions and the mainly backward-looking inflation report were hard to read; improve drafting by taking well-drafted English texts from leading central banks and translating into (good) Russian to ensure consistency and clarity. - Forward-looking orientation: - Press release and Chairman’s statement should focus on the inflation target and explain how the policy decision helps achieve it to better anchor expectations and build support. - Education: - Educate press, policymakers, and the public that a continuous medium-term inflation target does not imply hitting the target every month; inflation will fluctuate due to shocks, and policy aims to keep inflation fluctuating around the target over the medium term. ### IV. Foreign exchange interventions — framework, practice, and recommendation - FX intervention framework and practice: - The exchange rate is flexible. - The NBRB has a published intervention rule (developed with earlier IMF TA) that clarifies the NBRB may, within daily intervention limits, intervene to smooth daily fluctuations of the Belarusian ruble exchange rate against an unspecified basket of currencies when the change in the exchange rate relative the previous day are outside a non-specified band. - The NBRB currently purchases FX opportunistically for reserve accumulation purposes, which: - Risks being operationally inconsistent with the published smoothing rule. - Risks confusing the market about the NBRB’s real intentions and its volatility tolerance. - Suggested modalities: - For reserve accumulation in deep and liquid FX markets: purchase relatively small amounts throughout the day based on offer quotes and act as anonymously as possible. - For volatility management and maximizing impact: use highly visible transaction forms such as flash auctions. - Communicate the operational framework in advance and state that a buy operation would be canceled if a flash sale auction is required the same day to address disorderly market conditions. - Recommendation: - Align the modality of FX market operations with their purpose to avoid conflicting signals and enhance effectiveness in addressing disorderly market conditions and excessive exchange rate volatility. ### V. Liquidity forecasting and interbank money market operations — assessment and guidance - Operating framework status: - The current interest-rate-focused fixed-rate full-allotment implementation framework is working reasonably well. - Key features: - Uses seven-day NBRB securities that de facto are issued at the policy rate with full allotment to mop up excess reserves and keep short-term interest rates aligned with the policy rate. - The policy rate is set in the middle of a 200-basis points (bps) corridor formed by full-access standing facilities. - Operations are properly sequenced within a 4–5 week reserve maintenance period (RMP) with averaging. - Trading is concentrated towards the end of the RMP; overnight interbank rates then tended to drop well below the policy rate. - A recently introduced overnight open market operation on the last day of the RMP should help address the end-of-RMP drop in overnight rates. - Observed intraperiod interbank rate behavior and causes: - Overnight interbank rates tend to be above the policy rate during the earlier part of the RMP, largely due to a limited number of transactions by one or two smaller and less-creditworthy banks that are structurally short and subject to a large counterpart risk premium. - These banks frequently access the NBRB lending facility (using FX-denominated assets as collateral). - Development of a secured interbank market, including a FX exchange swap or FX repo interbank market, may be needed. - Volatility in observed interbank rates may reflect varying counterpart risk premiums rather than misalignment of the risk-free rate with the policy rate; clearer communication that the objective is to keep all short-term interest rates aligned with the policy rate may help. - Assessment of fixed-rate full-allotment versus alternative frameworks: - Fixed-rate full-allotment operations are commonly recommended; the NBRB configuration with the added overnight operation on the last day of the RMP is largely in line with best practice for such a framework. - To fully address the end-of-RMP problem, the newly introduced overnight operation on the last day of the RMP should ideally take place at the end of the day (when all aggregate autonomous flows and retail settlement transactions have taken place) and not in the morning or the middle of the day. - Publishing the central bank’s forecast of autonomous flows and clarifying that the central bank aims at keeping the system structurally long may help reduce end-of-RMP problems. - Banks need to fully understand that the key interest rate is a fixed rate at which seven-day securities are issued (not a maximum rate in Dutch or American fixed-quantity flex-price auctions), and that the central bank is committed to fully satisfy demand in the quantity tender. - Ensuring banks are confident they can freely access the NBRB standing lending facility when they have required collateral, and that there should be no stigma associated with accessing it, is important for containing interest rate volatility and ensuring market rates stay aligned with the policy rate. - Liquidity forecasting implications: - Sophisticated liquidity forecasting models exist, but forecast accuracy may not be sufficient to base high-frequency operations on them. - Shifting to a conventional fixed-quantity flex-price open market operation framework requires very accurate forecasting of daily autonomous liquidity flows over the RMP and is demanding to operate; inaccurate forecasts could increase volatility. - Current practice of commercial bank bidding for parts of government deposits complicates liquidity forecasting and reduces the NBRB’s ability to control liquidity conditions using fixed-quantity flex-price operations. - Under the floor system: ensure the system is sufficiently long so that interest rates are consistently pushed down to the floor formed by the central bank’s deposit facility. - Under the fixed-rate full-allotment system: ensure the system is sufficiently long or short so there’s no risk of having to shift high-frequency operations from persistently mopping up excess reserves to injecting reserves or vice versa. - The main role of liquidity forecasting under these frameworks is to support structural operations using longer-term instruments to ensure the system stays in the desired structural position. *Source: 1blrea2020004 - Preface; canonical URL: https://www.imf.org/-/media/files/publications/cr/2020/english/1blrea2020004.pdf* ### Preface ___________________________________________________________________ 5 ### 1blrea2020004 - Preface ### Preface: mission scope and participants - Mission: follow-up MCM TA mission to the National Bank of the Republic of Belarus (NBRB), Minsk, November 11–20, 2019. - Mission team: Mr. Nils Maehle (IMF, MCM Department) and Mr. Karel Musil (external expert, Czech National Bank). - Objectives: - Assess progress from earlier eight missions and two in-country customized training events in the first phase of the “Building Capacity in Monetary Policy Modeling and Analysis” project (SIDA-funded). - Initiate the second phase of the project lasting until end-2020 focusing on sectoral analysis and near-term forecasting (NTF) tools. - Assess internal and external communication. - Discuss enhancing the foreign exchange intervention framework. - Discuss improvements and plans for liquidity forecasting and interbank money market operations to align short-term market interest rates with the policy rate. - NBRB counterparts met: Mr. Dmitry Kalechits; Mr. Dmitry Murin; Ms. Zhanna Snopkova; Mr. Andrey Golodushko; Ms. Natalia Mironchik; Mr. Denis Goregliad; Mr. Dmitry Ostanin; Mr. Dmitry Vanitskiy; Mr. Sergey Salak; other senior officials and staff. - Acknowledgement: appreciation expressed to NBRB management and staff and Ms. Julia Lyskova at the IMF Office in Belarus. ### Executive summary — key findings - FPAS integration and staff capacity: - The FPAS and model-based forecasts/policy analysis are now well integrated into the policy-making process. - Staff are well trained and experienced with the tools developed; the forecasting unit expanded with several newly recruited young economists. - The quarterly full model-based forecasting and policy decision rounds have become routine and a key input to decision making. - Additional less formal interaction between staff and board members between formal meetings may further enhance the process. - Internal and external communication: - Internal board presentations were well focused and technically solid with a reasonably clear story line, but medium-term forecasts were presented as mechanical extrapolation rather than as driven by the monetary policy stance needed to achieve the policy objective. - External monetary policy statements suffered from the same weakness and could benefit from streamlining, sharper focus on the key message, and simplification of language for non-expert audiences. - Monetary policy framework: - The de facto framework is close to inflation targeting (IT lite) but has three main weaknesses: - (i) the inflation target is revised annually; - (ii) the target is not continuous but for the end-of-year inflation rate; - (iii) the target is set as a ceiling (current target: keep inflation below 5 percent at end-2019) while technically treated as a point target, leaving no buffer against unpredictable shocks. - Recommendation: replace current end-of-year inflation ceiling with a continuous medium-term point inflation target to improve communications, better anchor expectations, and provide flexibility to respond to temporary shocks. - Moving to a continuous medium-term target requires being allowed to publish forecasts and a more transparent forward-looking external communication. - Near-term forecasting and sectoral analysis: - Current setup for sectoral analysis, nowcasting, and NTF is technically sophisticated and detailed but somewhat too mechanical; univariate time-series models (e.g., ARIMA) may be pulled by recent outliers and miss trend-cycle changes. - A more structural approach that incorporates expert judgment and known developments often yields more accurate near-term forecasts, especially during large shocks or structural changes. - Foreign exchange (FX) interventions: - NBRB FX operations may not be fully consistent with the published intervention framework because of reserve accumulation needs; this can cause market confusion about NBRB intentions and volatility tolerance. - Recommendation: align modality of FX market operations with their purpose to avoid sending conflicting signals and to enhance the impact of interventions addressing disorderly market conditions and excessive exchange rate volatility. - Liquidity forecasting and interbank market operations: - The current interest-rate focused fixed-rate full-allotment implementation framework is working reasonably well. - The recently introduced overnight open market operation on the last day of the reserve maintenance period (RMP) should help address interbank rates falling below the policy rate on the last day of the RMP, but should ideally be conducted at the end of the trading day and not in the morning or middle of the day. - The tendency for interbank rate to be above the policy rate during the earlier part of the RMP is due to a few trades by some smaller less creditworthy banks that are structurally short and face a large counterpart risk premium; these may not be material. - Recommendation: develop a secured interbank market (including FX exchange swap or FX repo) and ensure banks understand the operating framework, that seven-day securities are issued at the policy rate, and that NBRB is committed to fully satisfying demand in the quantity tender. ### Table 1 — Key Recommendations (as presented) - Replace the current end-of-year inflation target with a continuous medium-term inflation target. - Timing: Medium Term - Priority: 1 - Increasing the quality of the external communication documents, including particularly their English version. - Timing: Short Term - Priority: 1 - Further improve the NTF tools and introduce structural models that facilitate more of a story-telling approach. - Timing: Medium Term - Priority: 3 - Comments: Gradual process. Further technical assistance to help with this is planned under this project. - Further enhance the internal board presentations along the lines discussed. - Timing: Short Term - Priority: 3 - Aligning the modality of the FX market operations with their intended purpose. - Timing: Medium Term - Priority: 4 - Conduct the newly introduced overnight open market operation at the end of the trading day and not in the morning or middle of the trading day of the last day of the reserve maintenance period. - Timing: Medium Term - Priority: 3 - Ensure that banks properly understand the NBRB’s operating framework for keeping short-term market interest rates aligned with the policy rate, including that the seven-day securities are issued at the policy rate and that the NBRB is committed to fully satisfy the demand in this quantity tender. - Priority: 2 Notes attached to the table: - The timing horizon for the short-term period is understood to be up to two quarters, the medium-term horizon is three to six quarters. - The prioritization ranks the action from the most important (1) to the least important (4). ### I. Progress during the Monetary Policy Modeling Capacity Project — key points - FPAS and QPM: - The Quarterly Projection Model (QPM) is the core medium-term policy analysis model at the center of the FPAS and is being used routinely. - Staff and process: - Staff are trained and experienced; forecasting and decision-making process is well structured and increased two-way interaction with the NBRB board. - Communication and framing: - Internal and external documents tended to describe the monetary policy stance as "neutral," consistent with NBRB’s current estimate of a 4–5 percent real equilibrium interest rate, but this framing may not help change public perception of NBRB’s policy objective or anchor inflation expectations. - Recommendation reiterated: - Replace end-of-year inflation ceiling with a continuous medium-term inflation target (example formulation: keeping inflation around 5 percent over the medium term) to improve communications and policy flexibility; this requires permission to publish forecasts and more transparent forward-looking external communication. ### II. Enhancing near-term forecasting, sectoral analysis, and forecast disaggregation tools — specific findings and actions - Limitations of current methods: - Univariate time-series (ARIMA, factor models) are useful but can be overly mechanical and sensitive to outliers; separating outliers from trend-cycle changes is critical. - Recommended enhancements by component: - Inflation: - Supplement current ARIMA and factor models with more structural short-term models and expert judgment, possibly at a more aggregated level. - Real GDP: - Move from aggregate time-series toward a more structural and detailed approach based on main supply and demand side GDP components to build a more detailed nowcast and near-term forecast story. - Nominal wages: - Use a story-telling approach; deeper analysis of tariff and bonus components of private sector wages; establish links between wage and productivity dynamics and passthrough from government to private sector wages. - Fiscal analysis: - Progress in enhancing fiscal policy analyses and calculating the fiscal impulse is encouraging; iterative process between fiscal experts and the QPM team is needed to properly estimate the fiscal impulse. - Recursive macroeconomic model: - The newly developed recursive macroeconomic model can support a more structured near-term forecasting approach and disaggregation of QPM output but may require simplification and reformulation; error-correction models have good near-term forecasting properties but are not suitable for forward-looking medium-term policy analysis as they lack an explicit role for policy. - Disaggregation level: - Current high level of output disaggregation (legacy financial programming approach) is resource intensive, may produce projections of questionable quality and limited analytical value, and can distract policymakers; the right balance of detail is required. - Project phase 2: - The planned one-year second phase will aim to help NBRB staff enhance these tools along the lines outlined above. ### III. Enhancing internal and external communication — actionable guidance - General goal: sharpen policy message, increase prominence of price stability objective and role of monetary policy. - Internal presentations: - Highlight main forecast messages; remove distracting details; present medium-term forecasts as policy-driven outcomes rather than mechanical extrapolations. - External communication: - Streamline and sharpen focus of press releases and Chairman’s monetary policy statement; simplify language for press and non-expert audiences. - Use headlines, topical sentences, and single-sound bite sentences to increase pickup by the press. - Adopt a top-down drafting approach with topical sentences highlighting core messages followed by elaboration. - English and Russian texts: - The English versions and the mainly backward-looking inflation report were hard to read; improve drafting by taking well-drafted English texts from leading central banks and translating into (good) Russian to ensure consistency and clarity. - Forward-looking orientation: - Press release and Chairman’s statement should focus on the inflation target and explain how the policy decision helps achieve it to better anchor expectations and build support. - Education: - Educate press, policymakers, and the public that a continuous medium-term inflation target does not imply hitting the target every month; inflation will fluctuate due to shocks, and policy aims to keep inflation fluctuating around the target over the medium term. ### IV. Foreign exchange interventions — summary from Executive Summary - Current issue: - NBRB FX operations for reserve accumulation may not be fully consistent with the published intervention rule, causing market confusion about intentions and volatility tolerance. - Recommendation: - Align modality of FX market operations with their purpose to avoid conflicting signals and enhance effectiveness in addressing disorderly market conditions and excessive exchange rate volatility. ### V. Liquidity forecasting and interbank money market operations — summary from Executive Summary - Operating framework status: - Interest rate-focused fixed-rate full-allotment implementation framework is working reasonably well. - Last-day RMP operation: - Newly introduced overnight open market operation on the last day of the RMP should be conducted at the end of the trading day rather than earlier in the day. - Interbank rate dynamics: - Interbank rate above the policy rate during earlier RMP days is driven by a few smaller structurally short banks facing counterpart risk premium; development of secured interbank instruments (FX exchange swap or FX repo) may be needed. - Market understanding: - Ensure banks understand the operating framework, that seven-day securities are issued at the policy rate, and NBRB’s commitment to fully satisfy demand in the quantity tender to ensure proper functioning. *Source: 1blrea2020004 - Preface; canonical URL: https://www.imf.org/-/media/files/publications/cr/2020/english/1blrea2020004.pdf* ### 11. NBRB operations in the FX market may not be fully consistent with its ### 11. NBRB operations in the FX market may not be fully consistent with its ### FX intervention framework and practice - The exchange rate is flexible. - The NBRB has a published intervention rule (developed with earlier IMF TA) that: - Clarifies the NBRB may, within daily intervention limits, intervene to smooth daily fluctuations of the Belarusian ruble exchange rate against an unspecified basket of currencies when the change in the exchange rate relative the previous day are outside a non-specified band. - The NBRB currently purchases FX opportunistically for reserve accumulation purposes, which: - Risks being operationally inconsistent with the published smoothing rule. - Risks confusing the market about the NBRB’s real intentions and its volatility tolerance. - Alignment of the modality of FX operations with their purpose can: - Help avoid sending conflicting signals. - Enhance the impact of interventions aimed at addressing disorderly market conditions and excessive exchange rate volatility. ### Suggested modalities for reserve accumulation versus volatility management - In countries with a deep and liquid FX market and a well-established trading platform: - For reserve accumulation purposes, the central bank may choose to purchase each day a relatively small amount throughout the day based on offer quotes in the market, acting as anonymously as possible. - For maximizing impact on market conditions and volatility, use more highly visible transaction forms such as flash auctions. - The central bank may want to clearly communicate this operational framework in advance and state that it would cancel a buy operation if it on the same day would have to do a flash sale auction to address disorderly market conditions. ### Current liquidity operating framework (implementation) - The current interest-rate-focused fixed-rate full-allotment operating—or implementation—framework is working reasonably well. - Key features of the current framework: - Uses seven-day NBRB securities that de facto are issued at the policy rate with full allotment to mop up excess reserves and keep short-term interest rates aligned with the policy rate. - The policy rate is set in the middle of a 200-basis points (bps) corridor formed by full-access standing facilities. - Operations are properly sequenced within a 4–5 week reserve maintenance period (RMP) with averaging. - Trading is concentrated towards the end of the RMP; overnight interbank rates then tended to drop well below the policy rate. - A recently introduced overnight open market operation on the last day of the RMP should help address the end-of-RMP drop in overnight rates. ### Observed intraperiod interbank rate behavior and causes - Overnight interbank rates tend to be above the policy rate during the earlier part of the RMP, largely due to: - A limited number of transactions by one or two smaller and less-creditworthy banks that are structurally short and subject to a large counterpart risk premium in the market. - These banks frequently accessing the NBRB lending facility (using FX-denominated assets as collateral). - Development of a secured interbank market, including a FX exchange swap or FX repo interbank market, may be needed to address this issue. - Volatility in observed interbank rates may reflect varying counterpart risk premiums rather than misalignment of the risk-free rate with the policy rate; clearer communication that the objective is to keep all short-term interest rates aligned with the policy rate may help. ### Assessment of fixed-rate full-allotment versus alternative frameworks - Fixed-rate full-allotment operations are commonly recommended; the NBRB configuration with the added overnight operation on the last day of the RMP is largely in line with best practice for such a framework. - To fully address the end-of-RMP problem, the newly introduced overnight operation on the last day of the RMP should ideally take place at the end of the day (when all aggregate autonomous flows and retail settlement transactions have taken place) and not in the morning or the middle of the day. - Publishing the central bank’s forecast of autonomous flows and clarifying that the central bank aims at keeping the system structurally long may help reduce end-of-RMP problems. - Banks need to fully understand that the key interest rate is a fixed rate at which seven-day securities are issued (not a maximum rate in Dutch or American fixed-quantity flex-price auctions), and that the central bank is committed to fully satisfy demand in the quantity tender. - Ensuring banks are confident they can freely access the NBRB standing lending facility when they have required collateral, and that there should be no stigma associated with accessing it, is important for containing interest rate volatility and ensuring market rates stay aligned with the policy rate. ### Liquidity forecasting and implications for operating framework choice - Sophisticated liquidity forecasting models exist, but forecast accuracy may not be sufficient to base high-frequency operations on them. - Shifting to a conventional fixed-quantity flex-price open market operation framework (to keep excess reserves stable and close to zero and market rates aligned with the policy rate) requires very accurate forecasting of daily autonomous liquidity flows over the RMP. - This framework is demanding to operate and could increase volatility if forecasts are inaccurate. - It would increase banks’ need for overnight interbank trading and stimulate overnight interbank market activity, but benefits to policy transmission may be limited or even negative if poorly calibrated operations increase short-term interest-rate volatility. - Current practice of commercial bank bidding for parts of government deposits: - Complicates liquidity forecasting. - Reduces the NBRB’s ability to control liquidity conditions using fixed-quantity flex-price operations. - Renders the current fixed-rate full-allotment system or a floor system the only viable options. - The main role of liquidity forecasting under these operating frameworks is to support structural operations using longer-term instruments to ensure the system stays sufficiently long or short: - Under the floor system: sufficiently long so that interest rates are consistently pushed down to the floor formed by the central bank’s deposit facility. - Under the fixed-rate full-allotment system: sufficiently long or short so there’s no risk of having to shift the sign of the high-frequency operations from persistently mopping up excess reserves to injecting reserves or vice versa. *Source: 1blrea2020004 — chapter 11.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1blrea2020004.pdf_