The main instruments of monetary policy
- Open market operations
- Automatic facilities
- Liquidity-providing repo operations
- Minimum reserves
- FX interventions
- Current settings of main monetary policy instruments
- Main instruments of monetary policy - history of settings (development of CNB rates)
Open market operations are used for steering interest rates in the economy. Open market operations are mostly executed in the form of repo operations (based on a general agreement on trading on the financial market). With regard to their aim and regularity, the CNB's open market operations can be divided into the following categories:
- The main monetary policy instrument takes the form of repo tenders. The CNB accepts surplus liquidity from banks and in return transfers eligible securities to them as collateral. The two parties agree to reverse the transaction at a future point in time, when the CNB as borrower repays the principal of the loan plus interest and the creditor bank returns the collateral to the CNB. The basic duration of these operations is 14 days; the two-week repo rate (2W repo rate) is therefore considered to be of key importance in terms of monetary policy. Repos with shorter maturities are executed from time to time depending on the forecasts of banking sector liquidity. Owing to the systemic liquidity surplus in the Czech banking sector, 2W repo tenders are currently used exclusively for absorbing liquidity.
The CNB conducts variable rate tenders, which means that the declared repo rate serves as the maximum limit rate at which banks' bids can be satisfied in the tender. The bids are ranked using the American auction procedure, i.e. those with the lowest interest rate are satisfied as having priority and those with successively higher rates are accepted until the total predicted liquidity surplus for the day is exhausted. If the volume ordered by the banks exceeds the predicted surplus, the CNB either completely refuses the bids at the highest rate or reduces them pro rata. Repo tenders are usually announced three times a week at around 9.30 a.m. Banks may submit their orders - i.e. the amounts of money and the interest rates at which they want to enter into transactions with the CNB - within a prescribed time. The minimum acceptable volume is CZK 300 million. Bids exceeding the minimum must be expressed as multiples of CZK 100 million.
- The supplementary monetary instrument is the three-month repo tender. Here, the CNB accepts liquidity for a three-month period. The three-month repo tender again uses the American auction procedure (see the two-week repo tender). In these operations, the CNB does not intend to send signals to the market and therefore the three-month repo rate used for this tender is not the CNB's rate but the money market rate in effect at the time of calling the tender. At present this instrument is not used. The last three-month tender was called in January 2001.
- Fine-tuning instruments (foreign exchange operations and securities operations) are used ad hoc, mainly to smooth the effects on interest rates caused by unexpected liquidity fluctuations in the market. These instruments are rarely used.
Click here for the recent open market operations.
Automatic facilities are used for providing and depositing liquidity overnight. As, from the banks' point of view, these represent standing facilities for depositing or borrowing money, the interest rates applied to them form the corridor for short-term money market rates (as well as for the two-week repo rate).
- The deposit facility is a non-collateralised standing facility which banks may use to make overnight deposits of surplus liquidity with the CNB. A bank has right of access to the deposit facility provided that it requests the CNB's Interventions Division to execute the transaction no later than 15 minutes before the end of the CERTIS system clearing day. The minimum volume is CZK 10 million. Amounts exceeding this limit are accepted without further restrictions. The deposits are remunerated at the discount rate, which generally provides a floor for short-term interest rates on the money market.
- The marginal lending facility is a standing facility which banks that have a general repo agreement with the CNB may use to obtain overnight liquidity from the CNB in the form of repos. A bank has right of access to the lending facility provided that it requests the CNB's Interventions Division to execute the transaction no later than 25 minutes before the end of the CERTIS system clearing day. The minimum volume is CZK 10 million. Amounts exceeding this limit are provided without further restrictions. The interest rate applied to this facility is the Lombard rate. Owing to a persistent liquidity surplus, banks make minimal use of this facility. The Lombard rate provides a ceiling for short-term interest rates on the money market. The CNB may at any time, for extraordinary monetary-policy reasons, temporarily limit or completely suspend the provision of Lombard loans.
In autumn 2008, the CNB introduced extraordinary liquidity-providing repo operations with two-week and three-month maturities aimed at supporting the functioning of the government bond market. Since January 2011, only the liquidity-providing repo operation with two-week maturity remains in place. Since March 2020, the liquidity-providing repo operation is announced three times a week.
In general, the minimum reserves are generally one of the main monetary policy instruments through which the central bank can influence the amount of liquidity (free funds) in the banking system. In the Czech environment of a substantial liquidity surplus, however, this role is declining and the minimum reserves serve mainly as a cushion for the smooth functioning of the interbank payment system.
The application of the reserve requirement in practice involves several areas (obliged entities, the reserve requirement rate, maintenance periods, the reserve base, fulfilment of the reserve requirement, remuneration, the reserve requirement where statements are not submitted, etc.) whose individual parameters can change flexibly, reflecting the need to react to changes in trend in the banking system.
Pursuant to the Act on the Czech National Bank, every bank, building society, foreign bank branch that has a banking licence in the Czech Republic or intends to operate in the Czech Republic on the basis of the "Single Licence", and from 1 January 2012 also every credit union, is required to hold minimum reserves, i.e. a pre-specified volume of liquid funds, on its account with the CNB. At present, each bank holds its minimum reserves on its account with CNB Clearing ("payment system account") and/or on a deposit and withdrawal account if such an account has been opened, or on a special minimum reserves account. The reserve requirement is 2% of the base used for calculating the minimum reserves. Effective from 12 July 2001, the reserve base is the volume of the bank's primary liabilities vis-a-vis non-banks with maturity up to 2 years. The minimum reserve system operates on the averaging principle, i.e. each bank is required to maintain over a maintenance period (of approximately one month - starting on the first Thursday of the respective month and ending on the Wednesday before the first Thursday of the following month) an average end-of-day balance on its minimum reserves accounts equal to or greater than the reserve requirement set for the given maintenance period. Since 12 July 2001, the funds on this account have been remunerated at the CNB two-week repo rate up to the pre-specified volume of minimum reserves (before this date they were not remunerated).
To keep the interbank payment system functioning smoothly following the lowering of the reserve requirement to its present level, a collateralised (i.e. extended to banks in exchange for securities) intraday credit facility was introduced after the reserve requirement was lowered. Within this facility, the CNB - as the operator of the payment system and the short-term bond settlement system - provides short-term intraday credit to banks to enable them to make payments even if they do not have sufficient funds on their payment system accounts with the CNB. No interest is charged on intraday credit and there is automatic spillover into the marginal lending facility in the event of non-repayment.
FX interventions are purchases or sales of foreign currencies against the Czech koruna on the foreign exchange market by the CNB. They are aimed at dampening foreign exchange market volatility and/or easing/tightening monetary policy. FX interventions are not a regularly used instrument in the inflation targeting regime. The standard instrument is interest rates. Nevertheless, FX interventions may be used under certain circumstances. An example of such a situation is a reduction in monetary policy interest rates to “technical zero”, where further monetary policy easing can be achieved by weakening the koruna exchange rate. The CNB faced this situation between autumn 2013 and spring 2017, when it used an exchange rate commitment to intervene on the foreign exchange market if necessary to weaken the koruna so as to maintain the exchange rate close to CZK 27 to the euro.
|Interest rates||Interest rate||Valid since|
|two-week repo operations – 2W repo rate||1.00%||27 March 2020|
|deposit facility – discount rate||0.05%||27 March 2020|
|marginal lending facility – Lombard rate||2.00%||27 March 2020|
|Reserve requirements||Rate on primary deposits||Valid since|
|banks||2.00%||7 October 1999|
|building societies and ČMZRB||2.00%||7 October 1999|