Monetary Implementation Framework
Monetary policy implementation consists of: (1) adequately sizing the banking system liquidity deficit to ensure the effectiveness of the monetary policy transmission; (2) forecasting the liquidity needs of the banking system arising from the development of the autonomous liquidity factors, over the forecasting horizon; and (3) executing the open market operations.
Central bank liquidity management means supplying the market the amount of liquidity consistent with a desired level of short-term interest rates. This is achieved through open market operations and requires analyzing and forecasting the liquidity situation of the Albanian banking system. This allows the monetary policy stance, signaled by the BoA’s minimum bid rate at the weekly main refinancing operations, to be distinguished from the monetary policy implementation, aimed at steering the short-term interbank rates towards the Bank of Albania’s key interest rate, and minimizing their volatility
FORECASTED LIQUIDITY NEEDS
The Bank of Albania analyzes and forecasts regularly the banking system’s liquidity needs over different time horizons. The liquidity needs of the banking system result from the minimum reserve requirements imposed on credit institutions and from autonomous factors, which are normally beyond the direct control of the Bank of Albania. Such factors can be banknotes in circulation, government deposits with the Bank of Albania, as well as foreign reserve assets and domestic financial assets.
This is illustrated by the following, simplified balance sheet:
|Assets (liquidity supply)
|Liabilities ( liquidity needs)
|Open market operations
|Marginal lending facility
|Net Liquidity effects from autonomous factors
Furthermore, since not all the banking system’s liquidity in excess of minimum reserve holdings is available for trading due to binding credit and counterparty limits, the Bank of Albania analyzes the liquidity distribution across banks to estimate the excess liquidity not available for trading.
The result of this analysis allows the Bank of Albania to calibrate open market operations for satisfying the liquidity needs of the banking system in a way that, after taking into account its forecast of the autonomous liquidity factors, banks can fulfill their reserve requirements, on average, over the reserve maintenance period without systematic recourse to the standing facilities. If the central bank provides more, or less, liquidity than this benchmark, then banks will have to use the standing facilities, at the end of the maintenance period. This will push the short-term money market rate towards the relevant standing facility rate, as soon as the imbalance becomes obvious.
In line with the practice adopted by most central banks, whose monetary policy operational framework is similar to the one adopted in Albania, as of the first maintenance period of 2018, the Bank of Albania publishes, on a weekly basis, its own forecast of the development of the autonomous liquidity factors until the next main refinancing operation (MRO). The Bank of Albania will also publish its estimate of the benchmark MRO allotment i.e. the MRO allotment necessary to allow the pro rata reserve requirement fulfillment by the end of the MRO, taking into account the autonomous factors forecast and any liquidity imbalance. In other words, it means under or over proportional fulfillment of reserve requirements, accumulated from the beginning of the maintenance period.
Furthermore, the Bank of Albania will provide with ex post data the evolution of liquidity conditions.
The regular publication of these figures should:
Guide rational bidding in the weekly main refinancing operations from market participants. These participants may benefit from the central bank’s information on the items on central bank’s balance sheets that make up the autonomous factors and can better compare their own position with the expected market conditions;
Help market participants to better understand market developments;
Facilitate market participants in position taking ;
Contribute to the transparency and accountability of the Bank of Albania’s monetary policy implementation framework.
PUBLICATION OF EXPECTED LIQUIDITY DEVELOPMENTS
Expected liquidity developments will be illustrated by the figure of the forecasted average autonomous liquidity factors for a nine-day period, starting from (and including) the day of publication. It will also be illustrated by its forecast of the average non-tradable liquidity over the same nine-day horizon.
Autonomous Liquidity Factors are the items on the Bank of Albania’s balance sheet, which are not under its direct control, such as government deposits and cash in circulation, or are not directly related to monetary policy implementation and its instruments, such as the foreign reserve assets and domestic financial assets.
Autonomous Liquidity Factors correspond to Daily Current Account + Deposit Facility – Marginal Lending Facility – Main Refinancing Operations – Long Term Operations – Other Operations.
However, due to market segmentation and due to the trading limits between banks as well as for precautionary reasons, not all current account holdings in excess of the reserve requirements may be considered available for trading and for redeployment in the system. There is a structural demand of excess reserves beyond the minimum necessary to fulfill reserves requirements. Whenever such conditions are present, the Bank of Albania will also publish its estimate of the forecast average non-tradable liquidity for the forecasted period. Such non-tradable liquidity can be assimilated to a liquidity-absorbing autonomous liquidity factor.
Together with the expected liquidity developments as represented by the forecast of the autonomous factors and the non-tradable liquidity, the Bank of Albania provides the banks with the benchmark allotment amount, which is the neutral liquidity allotment necessary to ensure a pro rata fulfillment of reserve requirements by the maturity of the MRO, taking into account the autonomous factors and non-tradable liquidity forecasts.
The benchmark allotment is the amount that as a rule, in normal conditions, the Bank of Albania aims at injecting via its MRO. The benchmark calculation can be replicated by market participants based on the formula provided in the technical annex and the forecast provided by the Bank of Albania.
Fulfillment of the pro rata reserve requirement means that average current account holdings from the beginning of maintenance period should correspond with reserve requirement obligations.
Banks can calculate the benchmark allotment amount using the formula provided in the technical annex and the forecast provided by Bank of Albania.