Improving monetary policy tools

17-07-2023

Reforms continue to increase the role of the interest rate channel in the monetary policy transmission. In this regard, certain changes were made to the operational framework of monetary policy.

It is necessary to revise the rule of differentiation of required reserve ratios in order to regulate the money supply more effectively, further limit the concentration of liquidity in the banking system, and support de-dollarization trends. It should be noted that, as previously planned, with a view to limiting liquidity concentration, an increase in the level of differentiation of required reserves is being gradually implemented in order to avoid systemic risks in the banking sector. The analyses conducted to this end showed that the differentiated application of required reserve ratios depending on the size of deposits of legal entities allows reducing the liquidity concentration and sterilizing additional funds. Based on the results of the analysis, it was decided that the required reserve ratios for banks exceeding the equivalent of one billion manat of legal entities' deposits in national currency and the equivalent of seven hundred and fifty million manat of legal entities' deposits in foreign currency should be set at 10% and 12% respectively for all liabilities. For banks with the amount of deposits of legal entities in national currency less than the equivalent of one billion manat and the amount of deposits of legal entities in foreign currency less than the equivalent of seven hundred and fifty million manat, the required reserve ratios for all liabilities are set at 5% and 6% respectively. The required reserve ratios for liabilities to the non-resident financial sector and settlements with international financial organizations were maintained unchanged at zero. It has been decided that from July 2023 all banks must calculate required reserves in accordance with the new regulations, and from the next maintenance period (August 15, 2023) maintain required reserves in accordance with the new regulations. Banks have been duly informed about the changes in the "Regulations on the Ratio, Calculation and Maintenance of Required Reserves” and new norms of required reserves. The Central Bank estimates that recent changes in the rules and norms of differentiation of required reserves have an increasing impact on the cost of liabilities in the banking sector in the range of 0.03-04%.

In order to strengthen the impact of the interest rate corridor on other interest rates in the financial sector, it was decided to abolish the daily limit on standing deposit facilities (liquidity absorbing) from August 15, 2023.  Recall that the daily quota on standing deposit facilities (liquidity absorbing) was mainly used to intensify interbank operations. In recent months, a significant change in activity in the interbank market and banks' liquidity positions created conditions for the cancellation of the daily limit on the standing deposit facilities. At that, the liquidity absorbing will begin to fulfill its classical function, which should create conditions for the formation of interest rates in the interbank money market within the interest rate corridor of the Central Bank.

These changes serve to better manage inflation through interest rates over the medium term.