Monetary Policy Instruments
Monetary Operations Strategy Team Financial Markets Operations Group December 2012 Under the inflation targeting framework, the Bank of Thailand (BOT) uses the 1-day bilateral repurchase rate as the key policy rate. The Monetary Policy Committee (MPC) signals shifts in monetary policy stance through announced changes in the policy rate. The BOT uses a variety of monetary policy instruments to implement MPC's interest rate decisions.
Monetary Policy Instruments
The BOT’s operational framework consists of a set of instruments which can be classified into three categories: 1. Reserve Requirements 2. Open Market Operations (OMOs) 3. Standing Facilities
1. Reserve Requirements
Commercial banks are required to maintain a minimum reserves on average over a fortnightly period, (starting on a Wednesday and ending on a second Tuesday thereafter, consistent with MPC meeting rounds1) with carry-over provisions, equaled to a specified percentage of the previous period's average level of commercial banks' deposits/liabilities base. 1
The MPC meets on Wednesdays every 6 or 8 weeks. The MPC meeting days, therefore, always coincide with the beginning of the reserve maintenance period. Such synchronization eliminates the possibility of policy rate changes during the maintenance period, and thus helps reduce volatility in reserves holdings at the BOT (current account balances) as the opportunity costs of holding reserves are approximately equal throughout the entire maintenance period.
The reserve base comprises deposits, borrowings through issuance of bills of exchange or promissory notes, short-term foreign borrowings maturing within one year and other borrowings with index-linked returns or embedded financial derivatives. Currently, the reserve requirements ratio is 6%, and reserves consist of the following assets: 1) A minimum 1% in nonremunerated current account deposits at the BOT, (of which no more than 0.2% in cash at the central cash centers of commercial banks can be counted towards this component) 2) A maximum 2.5% in Vault cash. The cash at the central cash centers of commercial banks that is in excess of 0.2% can be counted as vault cash 1.0
(b) No more than 0.2%
Figure 1: Compositions of reserve requirements
Types of liquid assets
Remaining (including (a) (b) and (c)) no less than 6%
Unencumbered eligible public securities and term deposits at BOT
(c) No more than 2.5%
Cash at the central cash centers of commercial banks
No less than 1.0% (a) No less than 0.8%
Current account deposits at BOT
* Cash in excess of 0.2% at the central cash centers of commercial banks can be counted towards vault cash.
3) The rest in unencumbered eligible public securities and term deposits at the BOT Compliance with reserve requirements is determined on the basis of the average of the end-of-day balances of the banks’ reserves assets over a maintenance period. Such averaging arrangement helps to facilitate banks’ own liquidity management as well as to reduce daily volatility in short-term interest rates. For example, a bank may maintain reserves below the amount required on a particular day, and choose to increase its reserves holding on other days within the same maintenance period, without necessarily borrowing from the interbank market on that day which could put upward pressure on the interbank rates. 2
The carry-over provision provides commercial banks greater flexibility in liquidity management by allowing banks to transfer up to 5% of reserves between consecutive maintenance periods. This carry-over provision applies to the current account deposits component only and it works both ways. That is, banks can count part of this period’s excess reserves towards next period’s requirements by up to 5% of the requirements, and banks can make up 5% of current-period shortfalls in the next period. The carry-over provision helps reduce...
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