S A M P L E CONTENTS

FOREWORD INTRODUCTION

The operation of ...... 15 The money market and its impact on the economy ...... 15 Central banks’ influence on the money supply and interest rates ...... 16 Mechanism of transmission monetary policy ...... 17 Why inflation targets? ...... 20 The trilemma of open economies ...... 21 Summary ...... 23 NORTH AMERICA Canada

The Bank of Canada ...... 27 Objectives of monetary policy ...... 27 Factors guiding monetary policy ...... 27 Monetary policy application methods ...... 27 Instruments used by the Bank of Canada ...... 28 Deposit and lending standing facilities ...... 28 Auction of federal government deposits ...... 29 Special purchase and resale agreements ...... 29 Repurchase and sale agreements...... 29 Operations on the foreign exchange market ...... 29 Key interest rates ...... 29 Overnight rate ...... 29 Target for the overnightS A rate ...... M P L E 30 Official ...... 30 Rate for the standing deposit facility ...... 30 Principal publications to watch ...... 30 United States

The U.S. ...... 31 Objectives of monetary policy ...... 31 Factors guiding monetary policy ...... 31 Monetary policy application methods ...... 31 Instruments used by the U.S. Federal Reserve ...... 31 Purchase and resale and sale and repurchase agreements ...... 32 Purchase and sale of government securities ...... 32 Reserve requirements ...... 33 Operations on the foreign exchange market ...... 33 5 Key interest rates ...... 33 Effective rate ...... 33 Target for the ...... 33 Discount rate (primary rate) ...... 33 Principal publications to watch ...... 34 Mexico

The Bank of Mexico ...... 35 Objectives of monetary policy ...... 35 Factors guiding monetary policy ...... 35 Monetary policy application methods ...... 35 Instruments used by the Bank of Mexico ...... 36 Aggregate short depositor balances—Corto ...... 36 Purchase and resale and sale and repurchase agreements ...... 37 Purchase or sale of certificates issued by the Bank or of government securities ...... 37 Reserve requirements ...... 37 Operations on the foreign exchange market ...... 37 Key interest rates ...... 37 Interbank overnight funds rate ...... 37 28-day Cetes rate ...... 38 Principal publications to watch ...... 38 SOUTH AMERICA Argentina

The of the Republic of Argentina ...... 41 Objectives of monetary policy ...... 41 Factors guiding monetary policy ...... 41 Monetary policy applicationS A methods M ...... P L E 41 Instruments used by the Central Bank of the Republic of Argentina ...... 42 Repurchase and reverse repurchase agreements ...... 42 Security issues ...... 42 Purchase and sale of government securities ...... 42 Reserve requirements ...... 42 Operations on the foreign exchange market ...... 42 Key interest rates ...... 42 Rate on seven-day reverse repurchase agreements ...... 42 Rate on seven-day repurchase agreements ...... 42 Principal publications to watch...... 43

6 Brazil

The Central Bank of Brazil ...... 44 Objectives of monetary policy ...... 44 Factors guiding monetary policy ...... 44 Monetary policy application methods ...... 44 Instruments used by the Central Bank of Brazil...... 44 Repurchase and reverse repurchase agreements ...... 45 Purchase and sale of government securities (National Treasury Bills) ...... 45 Foreign currency swaps...... 45 Reserve requirements ...... 45 Operations on the foreign exchange market ...... 45 Key interest rates ...... 46 SELIC overnight rate (Sistema Especial de Liquidação e Custódia) ...... 46 Target for the SELIC overnight rate ...... 46 Principal publications to watch ...... 46 EUROPE Euro zone

The ...... 49 Objectives of monetary policy ...... 49 Factors guiding monetary policy ...... 49 Monetary policy application methods ...... 49 Instruments used by the European Central Bank ...... 50 Reverse transactions ...... 50 Purchase and sale of securities...... 50 Issuance of debt certificates ...... 51 Collections of fixed-term deposits...... 51 Standing facilities ...... 51 Foreign exchangeS swaps A...... M P L E 51 Reserve requirements ...... 51 Operations on the foreign exchange market ...... 51 Key interest rates ...... 52 Minimum bid rate for main refinancing operations (refi rate) ...... 52 Marginal lending facility rate ...... 52 Deposit facility rate ...... 52 Eonia rate (Euro Overnight Index Average) ...... 52

Principal publications to watch ...... 52

7 New countries that have joined the and are eligible for future expansion of the euro zone ...... 53 Czech Republic— ...... 54 Estonia— ...... 54 Cyprus—Central ...... 55 Latvia— ...... 55 Lithuania— ...... 56 Hungary—National Bank of Hungary ...... 56 Malta— ...... 57 —National ...... 57 Slovenia— ...... 58 Slovakia—National Bank of Slovakia ...... 58 United Kingdom

The ...... 59 Objectives of monetary policy ...... 59 Factors guiding monetary policy ...... 59 Monetary policy application methods ...... 59 Instruments used by the Bank of England ...... 59 Standing deposit and lending facilities ...... 60 Repo operations ...... 60 Operations on the foreign exchange market ...... 61 Key interest rates ...... 61 Repo rate ...... 61 Interbank overnight financing rate ...... 61 Rate of standing deposit and lending facilities ...... 61 Principal publications to watch ...... 61 Switzerland The Swiss NationalS Bank ...... A M P L E 62 Objectives of monetary policy ...... 62 Factors guiding monetary policy ...... 62 Monetary policy application methods ...... 62 Instruments used by the Swiss National Bank...... 62 Repo transactions...... 63 Foreign exchange swaps ...... 63 Reserve requirements ...... 63 Operations on the foreign exchange market ...... 63 Key interest rates ...... 64 Three-month LIBOR rate (London Interbank Offered Rate) ...... 64 Lombard rate ...... 64 Principal publications to watch ...... 64

8 Sweden

The Central Bank of Sweden ...... 65 Objectives of monetary policy ...... 65 Factors guiding monetary policy ...... 65 Monetary policy application methods ...... 65 Instruments used by the Central Bank of Sweden ...... 65 Purchase and resale agreements...... 65 Security issues ...... 66 Facilities for fine tuning interest rates ...... 66 Foreign exchange swaps ...... 66 Operations on the foreign exchange market ...... 66 Key interest rates ...... 67 Repo rate ...... 67 Overnight financing rate ...... 67 Overnight lending rate ...... 67 Overnight deposit rate...... 67 Principal publications to watch ...... 67 Norway

The Bank of Norway ...... 68 Objectives of monetary policy ...... 68 Factors guiding monetary policy ...... 68 Monetary policy application methods ...... 68 Instruments used by the Bank of Norway ...... 68 Fixed-rate loans and deposits (F-loans and F-deposits) ...... 69 Foreign exchange swaps ...... 69 Purchase and resale agreements...... 69 Operations on the foreign exchange market and Petroleum Fund...... 69 Key interest rates ...... S A M P L E 70 Sight deposit rate ...... 70 Interbank overnight rate ...... 70 Overnight lending rate ...... 70 Principal publications to watch ...... 70 Denmark

The National Bank of Denmark ...... 71 Objectives of monetary policy ...... 71 Factors guiding monetary policy ...... 71 Monetary policy application methods ...... 72 Instruments used by the National Bank of Denmark ...... 72 Issue or repurchase of certificates of deposit...... 72 Secured loans ...... 72 Operations on the foreign exchange market ...... 73 9 Key interest rates ...... 73 Discount rate...... 73 Rate on banks’ current accounts ...... 73 Lending rate ...... 73 Interbank overnight rate ...... 73 Principal publications to watch ...... 73 Russia

The Bank of Russia ...... 74 Objectives of monetary policy ...... 74 Factors guiding monetary policy ...... 74 Monetary policy application methods ...... 74 Instruments used by the Bank of Russia ...... 74 Repurchase and reverse repurchase agreements ...... 74 Issue of term deposit certificates ...... 75 Lombard credit (secured loan) ...... 75 Purchase and sale of securities...... 75 Foreign currency swaps...... 75 Reserve requirements ...... 75 Operations on the foreign exchange market ...... 75 Key interest rates ...... 75 Refinancing rate ...... 75 Deposit rates...... 75 Interbank overnight rate ...... 76 Principal publications to watch ...... 76 ASIA Japan The Bank of JapanS ...... A M P L E 79 Objectives of monetary policy ...... 79 Factors guiding monetary policy ...... 79 Monetary policy application methods ...... 79 Instruments used by the Bank of Japan ...... 79 Repurchase and reverse repurchase agreements ...... 79 Purchase and sale of securities...... 80 Purchase of asset-backed securities ...... 80 Reserve requirements ...... 80 Operations on the foreign exchange market ...... 80 Key interest rates ...... 81 Interbank overnight financing rate ...... 81 Official discount rate ...... 81 Collateralized loan rate ...... 81 Principal publications to watch ...... 81 10 South Korea

The Bank of Korea ...... 82 Objectives of monetary policy ...... 82 Factors guiding monetary policy ...... 82 Monetary policy application methods ...... 82 Instruments used by the Bank of Korea ...... 82 Repurchase and reverse repurchase agreements ...... 83 Security issues ...... 83 Lending facilities ...... 83 Reserve requirements ...... 83 Operations on the foreign exchange market ...... 83 Key interest rates ...... 84 Overnight rate ...... 84 Target for the overnight rate ...... 84 Overnight lending rate ...... 84 Principal publications to watch ...... 84 China

The People’s ...... 85 Objectives of monetary policy ...... 85 Factors guiding monetary policy ...... 85 Monetary policy application methods ...... 85 Instruments used by the People’s Bank of China ...... 86 Repurchase and reverse repurchase agreements ...... 86 Purchase and sale of securities...... 86 Reserve requirements ...... 86 Moral suasion (Window Guidance) ...... 87 Modifications to the benchmark ...... 87 Key interest rates S...... A M P L E 87 CHIBOR overnight rate (China Interbank Offered Rate) ...... 87 Bank Rate ...... 87 Rate on required reserves ...... 87 Principal publications to watch ...... 87 Hong Kong

The Hong Kong Monetary Authority ...... 88 Objectives of monetary policy ...... 88 Factors guiding monetary policy ...... 88 Monetary policy application methods ...... 88 Instruments used by the Hong Kong Monetary Authority ...... 89 Interest rate adjustment mechanism ...... 89 Lending facility () ...... 89 Issuing of Exchange Fund bills and notes ...... 89 11 Key interest rates ...... 89 Base rate ...... 89 HIBOR rates (Hong Kong Interbank Offered Rates) ...... 90 Discount rate...... 90 Principal publications to watch ...... 90 India

The ...... 91 Objectives of monetary policy ...... 91 Factors guiding monetary policy ...... 91 Monetary policy application methods ...... 91 Instruments used by the Reserve Bank of India ...... 91 Liquidity adjustment facilities ...... 91 Purchase and sale of securities...... 91 Reserve requirements ...... 92 Operations on the foreign exchange market ...... 92 Key interest rates ...... 92 Bank Rate ...... 92 Repurchase and reverse rates ...... 92 Interbank overnight rate ...... 92 Principal publications to watch ...... 92 OCEANIA Australia

The Reserve Bank of Australia ...... 95 Objectives of monetary policy ...... 95 Factors guiding monetary policy ...... 95 Monetary policy application methods ...... 95 Instruments used byS the ReserveA BankM of Australia P ...... L E 95 Repo transactions...... 96 Purchase and sale of government securities ...... 96 Standing overnight deposit and lending facilities ...... 96 Foreign currency swaps...... 96 Operations on the foreign exchange market ...... 97 Key interest rates ...... 97 Cash rate (overnight rate) ...... 97 Target for the cash rate...... 97 Rates for the standing deposit and lending facilities ...... 97 Principal publications to watch ...... 97

12 New Zealand

The Reserve Bank of New Zealand ...... 98 Objectives of monetary policy ...... 98 Factors guiding monetary policy ...... 98 Monetary policy application methods ...... 98 Instruments used by the Reserve Bank of New Zealand ...... 98 Standing deposit and lending facilities ...... 99 Repurchase and reverse repurchase agreements ...... 99 Operations on the foreign exchange market ...... 99 Key interest rates ...... 100 Official Cash Rate (overnight rate) ...... 100 Rates for the standing deposit and lending facilities ...... 100 Interbank overnight rate ...... 100 Principal publications to watch ...... 100 GLOSSARY BIBLIOGRAPHY

S A M P L E

13 EUROPE—Switzerland

Switzerland

The Swiss National Bank Factors guiding monetary policy

Since it began operations in 1907, the Swiss National The Swiss National Bank uses its inflation forecasts to Bank has been the Swiss Confederation’s central bank. guide its monetary policy. The forecasts are published The Bank is unusual in that it is a business corporation each quarter and cover a period of three subsequent governed by a special statute that, among other things, years. In the Bank’s opinion, that is about the time it takes specifies how its earnings are distributed. The Bank’s to transmit the monetary policy. One of the indicators shares are listed on the stock exchange and are mostly used in calculating the forecasts is the M3 monetary held by the cantons and cantonal banks. About one third aggregate. The central bank regards the M3 aggregate of shares are owned by individuals and companies; the as providing useful information regarding medium- and Confederation does not own any shares. In terms of long-term price trends. In the short term, the variables monetary policy, the new federal statute of 2003 used for inflation forecasting are primarily associated entrenches the central bank’s independence, as long as with changes in economic conditions and the exchange it carries out the duties set out in this same piece of rate. legislation. Monetary policy application methods Objectives of monetary policy The body entrusted with making monetary policy decisions Under Article 5 of the federal act concerning the Swiss is the Swiss National Bank’s Governing Board. The Board National Bank, the Bank must conduct monetary policy in has three members; they are appointed by the Federal the interests of the country as a whole and ensure price Council upon the recommendation of the Bank Council. stability. The federal government does not set out any Their mandates run for six years. The Governing Board specific inflation target, allowing the central bank to set its meets every quarter to rule on monetary policy. The own goals. Since 2000, the Swiss National Bank has been decision is made public through a press release stating aiming for less than 2% annual growth in the Swiss whether or not the monetary policy has been modified. In consumer price index. However, the Bank expects there concrete terms, the press release announces the range to be short-term price fluctuations as a result of changes for fluctuation in the three-month LIBOR (London Interbank in oil prices, the prices of other imported products and Offered Rate) rate, that is, the rate for three-month exchange rates. In such cases, the central bank only deposits in Swiss francs targeted by the central bank. responds if it believes long-term price trends could be affected. See the box on page 63 for an example of a press release issued for a quarterly monetary policy decision. The S A Mpress P release L is issued E in either Geneva or Zurich. Switzerland: Consumer price index

Ann. var. in % Ann. var. in % Instruments used by the Swiss National Bank 2.50 2.50 Inflation target < 2% 2.25 2.25 In achieving its goal of price stability, Switzerland’s cen- 2.00 2.00 1.75 1.75 tral bank intervenes in the financial markets to keep the 1.50 1.50 LIBOR rate within the limits it has set. Interest rates, 1.25 1.25 particularly short-term rates, vary with the supply of and 1.00 1.00 0.75 0.75 demand for money. The Bank uses instruments to smooth 0.50 0.50 out the level of liquidity according to demand and, 0.25 0.25 consequently, interest rates. The instruments it uses 0.00 0.00 include repo transactions, foreign exchange swaps and -0.25 -0.25 2000 2001 2002 2003 2004 2005 reserve requirements. Sources: Datastream and Desjardins, Economic Studies

62 Guide to monetary policies—EUROPE EUROPE—Switzerland

Repo transactions Reserve requirements

Since April 1998, the use of repo transactions has played Although this instrument has not been used since 1977, a dominant role in implementing the Bank’s monetary the Swiss National Bank can set a level for the minimum policy. To increase market liquidity and decrease interest reserves that counterparties must hold on average for a rates, the Bank can buy securities from an institution in given period, usually one month. The reserve ratio must exchange for liquidities against a promise to repurchase not exceed 4% of short-term liabilities denominated in the security on a given date. To decrease liquidity, the Swiss francs. Applied to monetary policy, if the Bank Bank can sell securities to financial institutions and wants to raise interest rates, for example, it must raise the promise to buy them back later. The term of these required reserves ratio, which makes liquidity scarcer contracts ranges from one day to several weeks. and pushes rates up.

Foreign exchange swaps Operations on the foreign exchange market

The Swiss National Bank acquires currencies (euros, Switzerland has a floating exchange rate. Of course, due dollars, etc.) from a financial institution in exchange for to its geography and history, Switzerland has very impor- Swiss francs for a set period. At maturity, the reverse tant trade and financial ties with the euro zone. The Swiss transaction occurs at the rate agreed on at the outset. National Bank therefore strives to minimize sudden varia- The central bank’s present strategy does not use currency tions in the Swiss franc against Europe’s currency, the swaps in applying monetary policy, except in extraordinary euro. cases.

Zurich, 17 March 2005

Monetary policy assessment of 17 March 2005

National Bank leaves the targetS range forA the three-monthM LIBORP rateL unchanged E at 0.25–1.25%.

The Swiss National Bank leaves the target range for the three-month LIBOR rate unchanged at 0.25–1.25%. It intends to keep the rate in the middle of the target range at around 0.75% for the time being.

Switzerland’s economy has lost more momentum than expected. The sluggish economic environment in Europe, in particular, has had a dampening effect. The National Bank anticipates economic growth of around 1.5% in 2005, and thus a continuation of the moderate economic recovery. It expects inflation to recede slightly during the year under review. The annual inflation rate should average 1%. On the assumption that the three- month LIBOR will remain unchanged at 0.75%, annual inflation is expected to stand at 1% in 2006 and reach 2.1% in 2007. Compared with the December assessment, the inflation prospects have improved slightly. An interest rate hike is therefore currently not appropriate. The National Bank’s monetary policy has an expansionary effect and continues to underpin the recovery. Should unexpected developments push up the Swiss franc, the National Bank will take appropriate action. […]

Guide to monetary policies—EUROPE 63 EUROPE—Switzerland

Lombard rate Switzerland: Exchange rate This is the rate at which interbank market participants can Swiss franc/US$ Swiss franc/euro* obtain last resort liquidity from the central bank. The 1.8 1.8 Bank makes advances against collateral, a type of credit 1.7 1.7 line granted according to the security offered, or Lom- 1.6 1.6 bard rate repo transactions, which are offered to institu- 1.5 1.5 tions that cannot meet their liquidity needs on the market. 1.4 1.4 The Lombard rate is revised every day, remaining at a 1.3 1.3 rate that is 200 basis points higher than the overnight 1.2 1.2

1.1 1.1 rate. 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Swiss franc/US$ Swiss franc/euro* Principal publications to watch * Prior to 1999, the rate is based on the Ecu.

Sources: Datastream and Desjardins, Economic Studies • Communications from the Governing Board: Watch for releases on monetary policy. Key interest rates • Quarterly Bulletin (and Monetary Policy Report): Concerned with monetary policy decisions and Three-month LIBOR rate economic developments; presents the inflation (London Interbank Offered Rate) forecasts. • Monthly Statistical Bulletin: Presents a report on the The LIBOR rate is the interest rate on three-month central bank’s operations, and looks at several Swiss deposits in Swiss francs. Since 2000, in handling its economic variables in detail. monetary policy, the Swiss National Bank has set a range for this rate’s fluctuation. The Bank announces the range—a total spread of 100 basis points—every quarter. The Bank also states its target for the LIBOR rate within that range: the upper part of the range, the lower part, or the mid-point. To influence the LIBOR rate, the Swiss National Bank frequently acts on markets using its monetary policy instruments.

Switzerland: Interest rate

In % In % 6 S A 6M P L E 5 5

4 4

Upper level 3 for the Libor rate fluctuation range 3

2 2

1 1 Lower level for the Libor rate fluctuation range 0 0

-1 -1 2000 2001 2002 2003 2004 2005 Libor rate Lombard rate

Sources: Datastream and Desjardins, Economic Studies

64 Guide to monetary policies—EUROPE GuideGuide toto monetarymonetary policiespolicies ofof thethe mainmain industrializedindustrialized andand emergingemerging countriescountries OORDERRDER FORMFORM

Nearly every day, in different ways and for different reasons, most of the world’s central banks intervene in the money market. Their actions have a major impact on the direction and volatility of the short-term interest rates negotiated on the secondary market. The central banks’ decisions and comments sometimes also have repercussions for all the other longer term interests, as well as for other financial market segments, particularly on stock market and currency markets.

This 116-page document contains a short description of the overall functioning of the monetary market in major industrialized and emerging countries, a survey of the central bank’s primary objectives and operational targets, a description of the principal interest rates to watch and a description of the means that the central banks use in achieving their monetary policy objectives.

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