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Monetary Policy | Monetary Policy Instruments

Monetary Policy Instruments

The main monetary policy instrument of the National Bank of Serbia is the key policy rate – interest rate applied in its main open market operations (currently, reverse repo transactions – repo sale of securities, with one-week transaction maturity).

Other monetary policy instruments of the National Bank of Serbia have a supporting role, facilitating unhindered transmission of the key policy rate effects to the market, as well as the development of the financial market.  These instruments include:

  • open market operations,
  • required reserves, 
  • lending and deposit facilities (standing facilities), and
  • interventions in the foreign exchange market.

Monetary policy instruments do not have a direct impact on monetary policy objectives. As there can be a several months’ lag in the effect of monetary policy, the National Bank of Serbia focuses on the achievement of operating and intermediate targets. Operating targets are easy to control, but are remote from the ultimate objective, while intermediate targets are hard to control, but closer to the ultimate objective. 

As in the case of more developed market economies, and particularly those pursuing inflation targeting regime, the National Bank of Serbia’s operating target are interest rates in the interbank money market, and its intermediate target is the inflation projection.

Open Market Operations

The National Bank of Serbia conducts open market operations in order to regulate banking sector liquidity, influence short-term interest rate movements and signal its monetary policy stance. Depending on their objectives, dynamics and implementation,  these operations are categorized as: 

  • main operations,
  • longer-term operations, 
  • fine-tuning operations.

The National Bank of Serbia implements open market operations through repo or outright purchase and sale of securities.

Principal Characteristics of the Open Market Operations Concept

Required Reserves

Required reserves are the amount of funds that banks are required to keep on deposit in accounts with the central bank.

Required reserves are calculated by applying the required reserve ratio to the reserving base. Required reserve base may be composed of all funding sources (deposits, loans and securities) or a part of them (e.g. deposits only). It may be uniform or differentiated, according to maturity and/or currency structure of the funding sources. 

By changing the reserve ratios, the central bank induces a reduction or expansion of commercial banks’ lending potential, and/or creation of additional liquidity. In market economies, required reserve ratio is used as an instrument for regulating bank credit potential rather than bank liquidity.

The National Bank of Serbia uses reserve requirements only as a supportive instrument when the effects of all other market-based measures of monetary regulation are exhausted. Decisions on the level of reserve ratios and the reserve base are taken by the National Bank of Serbia’s Executive Board.  >>>

Lending and Deposit Facilities (Standing Facilities)

Central bank’s standing facilities include lending and deposit facilities available to banks on an ongoing basis. Overnight in maturity, these operations are initiated by commercial banks.  Lending facilities include loans for maintaining daily liquidity, collateralised by eligible securities. Deposit facilities include excess liquidity deposits with the National Bank of Serbia. 

Interest rates on standing facilities constitute the ceiling and floor of the corridor of interest rates in the interbank market. As an important control factor in managing banking sector liquidity, they ease the fluctuations of short-term interest rates in the interbank market which would be more pronounced without such facilities.

Interest rates on standing overnight facilities, i.e. the corridor for overnight interest rate in the interbank money market  is determined with reference to the key policy rate:

  • rate on lending facilities: key policy rate +1.25 pp
  • rate on deposit facilities: key policy rate –1.25 pp.

Daily Liquidity Credit Against a Collateral of Securities

Depositing of Banks’ Excess Liquidity with the National Bank of Serbia

Interventions in the Foreign Exchange Market

In inflation targeting regime, foreign exchange interventions are an infrequently used secondary instrument which contributes to the achievement of the targeted inflation rate after the effective impact of the key policy rate has been exhausted.  
The National Bank of Serbia applies foreign exchange interventions  in exceptional circumstances, seeking to: 

  1. mitigate excessive daily oscillations of the dinar exchange rate,
  2. ensure financial stability, and  
  3. maintain adequate level of foreign exchange reserves.

Short Term Liquidity Loans Collateralised by Securities

In addition to applying the above main monetary policy instruments, the National Bank of Serbia also approves to banks short-term liquidity loans against collateral of securities.  In 2009 and 2010, these loans were approved in support of financial stability, whereas since 1 January 2011, they are approved to facilitate liquidity management for banks. They are extended at auctions and have the maturity of up to one year.  >>>







See More...
Open Market Operations
Daily Liquidity Credit Against a Collateral of Securities
Depositing of Banks' Excess Liquidity with the National Bank of Serbia
Interest Rates of the NBS
Required Reserves
Collateral for monetary operations and risk management
Main Characteristics of Monetary Policy Instruments