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Monetary Policy Instruments 

Monetary Policy Instruments (MPI) 

Concept and basic features 

1. Open market operations  

Open market operations an instrument used to regulate («sterilize»/replenish) the level of liquidity in the banking system.  

1.1. Auctions of notes of the National Bank  

The notes of the National Bank  are short-term discount government securities issued by the National Bank. The notes of the National Bank can be issued with maturity of 7, 14 and 28 days by decision of the Monetary Regulation Committee of the National Bank. The maximum yield of notes is set to the National Bank's policy rate at the date of the auction. The purpose of the auctions of notes of the National Bank is liquidity absorbing from the banking system in national currency. 

1.2. Operations on the secondary market  

  

1.2.1. Repo operations of the National Bank

Repo operations of the National Bank  purchase (repo)/selling (reverse repo) operations of government securities with an obligation of their reverse sales/purchase on a specific date in future and at a price agreed earlier.  

The aim of this instrument is to provide liquidity (repo) for the banking system or withdraw excessive liquidity (reverse repo) from the banking system. Auction based or fixed rate repo operations are conducted under resolution of Monetary Regulation Committee of the National Bank. Also, Monetary Regulation Committee of the National Bank makes decision on amount, term and interest rate of the repo operation. 

1.2.2. Purchase of government securities under “outright” conditions (rediscount operations of the National Bank)  

Purchase of government securities under «outright» conditions  purchase of government securities by the National Bank to provide liquidity in national currency for the banking system. Rediscount operations are conducted under resolution of Monetary Regulation Committee of the National Bank. Also, Monetary Regulation Committee of the National Bank makes decision on amount, type and term of the operation. 

2. Deposit operations of the National Bank in national currency  

Deposit operations of the National Bank in national currency  the aim of this instrument is to withdraw excessive liquidity from the banking system in national currency through attracting funds in the deposit account with the National Bank under recurrency, payment and urgency conditions. Auction based or fixed rate deposit operations are conducted under resolution of Monetary Regulation Committee of the National Bank. Also, Monetary Regulation Committee of the National Bank makes decision on amount, term and interest rate of the deposit operation. 

2.1. «Overnight» deposit 

«Overnight» deposit is the instrument, aimed to withdraw the short-term excessive liquidity and allowing the commercial banks to place deposit in the National Bank for the night under certain interest rate. The interest rate is set by Monetary Regulation Committee of the National Bank as the lower boundary of interest rate corridor. Commercial banks have permanent access to overnight deposit upon their request.  

3. Policy rate  

Policy rate  an instrument used as a major benchmark when determining the value of monetary resources in the economy. From March, 2014, the policy rate is determined by the decision of the Board of the National Bank. 

4. Reserve requirements (RR)  

The required reserves  is the instrument used as regulator of monetary aggregates volume, banking credit and demand for liquidity and as the means for risk reduction of the banking system insolvency. Depositing of the required reserves is performed by commercial bank in the form of funds allocation in the correspondent account with the National Bank. Required reserves are calculated once for a period in four weeks on the first working day of the current baseline period and are determined on the basis of the average daily calculation basis for the previous baseline period, and the scope of required reserves set by the Board of the National Bank. The established value of required reserves is valid for four baseline periods. Reserve requirement ratios, list of obligations included into the accounting base for calculation of the required reserves, compensation rate for fulfillment of the reserve requirements and amount of charge for non-fulfillment of the reserve requirements are established by the Board of the National Bank of the Kyrgyz Republic. From January 11, 2016, the reserve requirement ratio of commercial banks for liabilities in national currency amounts to 4.0 percent; for liabilities in Armenian drams, Belarussian rubles, Chinese Yuans Renminbi, Kazakhstan tenges, Russian rubles amounts to 4.0 percent; for liabilities in foreign currency with the exception above-mentioned currencies amounts to 12.0 percent. Accounting base for calculation of required reserves includes all deposits of physical and legal entities. From October 13, 2008, compensation rate for fulfillment of the reserve requirements has been equal to zero. In case of non-fulfillment of the reserve requirements, commercial bank is charged the three fold fee from the average National Bank policy rate for the base period.  

5. Refinancing operations  

Refinancing operations  a liquidity-providing tool is used to adjust the level of reserves in commercial banks in case of a liquidity shortage. 

5.1. Intraday lending facility (ILF) 

Intraday lending facility (ILF) is provided in the national currency on the interest-free basis during the trading day for several hours and secured by collateral in the form of Government securities of the Kyrgyz Republic. It is a standing facility tool used on the initiative of commercial banks to enhance efficiency of the payment system. 

5.2. Overnight lending facility 

Overnight lending facility is provided in the national currency for one day, secured by a collateral, to maintain short-term liquidity of the bank. Government securities of the Kyrgyz Republic are accepted as collateral. The interest rate is set by the Monetary Regulation Committee of the National Bank and the overnight interest rate is the upper boundary of the interest rate corridor. It is a standing facility tool used on the initiative of commercial banks. 

5.3. 7-day loan 

7-day loan is given in national currency for 7 days and secured by a collateral to maintain short-term liquidity. Government securities of the Kyrgyz Republic are accepted as a collateral. The 7-day loan is provided on an auction basis (at the initiative of the National Bank) and/or on the basis of open window (at the initiative of commercial banks) by decision of the Monetary Regulation Committee of the National Bank. The minimum interest rate for participation in the auction and/or fixed interest rate for the 7-day loan is set by the Monetary Regulation Committee of the National Bank. 

5.4. Credit auctions for the purposes of refinancing and maintenance of liquidity 

Credit auctions are held on the initiative of the National Bank to provide commercial banks with three and six months credits in national currency on the repayment basis to maintain liquidity and at lending to certain sectors of the economy. The interest rate and volume of credit are determined by the decision of the Monetary Regulation Committee. Government securities of the Kyrgyz Republic, foreign currency and the claim of loan portfolio that meet certain characteristics are accepted as a collateral.  

5.5. The loan of last resort 

The loan of last resort is provided in exceptional cases to commercial banks experiencing serious financial problems for up to 6 months. The interest rate is set by the Board of the National Bank. It is used at the initiative of commercial banks under the program of improvement of the bank. 

6. Foreign exchange operations 

Foreign exchange operations are operations with foreign currency in interbank foreign exchange market. 

6.1. Foreign exchange interventions 

Foreign exchange interventions are operations of buying or selling of foreign currency and aimed to smooth the excessive volatility of exchange rate. Foreign exchange interventions are conducted under resolution of Monetary Regulation Committee of the National Bank. 

6.2. Swap operations of the National Bank 

Foreign exchange swap operations of the National Bank are the operations of exchange of national (foreign) currency to foreign (national) currency with the liability of reverse exchange of principals and accrued interest rates in particular time. These operations are aimed to provide liquidity in national currency (direct swap) for the banking system or to withdraw excessive liquidity (reverse swap) form the banking system. Under resolution of Monetary Regulation Committee of the National Bank auction based swaps or fixed rate swaps are conducted. Also, Monetary Regulation Committee of the National Bank makes decision on amount, term and interest rate of swap.