Transcript Bank of Slovenia`s Operational Monetary Policy From the pre

Bank of Slovenia’s Operational
Monetary Policy
From the pre-ERM II phase to ERM II and the gradual
approach harmonising the operational monetary policy
framework to the Eurosystem
Peter Kukanja
Slovenia – Facts and Figures
• Independent since 1991, EU member since 2004
• Currencies: Slovenian tolar - SIT (1991 – 2006), € (2007 – )
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Population: 2.0 million
GDP 29.7 billion €, per capita 14,811€ (2006)
GDP real annual change: 5.2% (2006)
Unemployment rate (ILO): 5.0% (Feb 2007)
Annual inflation rate: 2.3% (Feb 2007)
BoP current account: –2.6% GDP (2006)
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Slovenia – Financial Environment
• Credit institutions (end 2006):
– 21 banks
– 3 saving banks
– 2 subsidiaries
• Banks’ balance sheet total: 120% of GDP (end 2006)
• Financial markets:
– treasury bills
– treasury bonds
• Eurobonds
• domestically issued bonds – listed on the Ljubljana Stock Exchange
– bank and corporate bonds
– equities
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Before Accession to the EU
• Independent monetary policy
• Free selection of exchange rate regime
• Countries have to:
– ensure the independence of the central bank
– ensure the prohibition of financing the state
– ensure the liberalisation of international capital flows
• Slovenia:
– Sep 1999: new foreign exchange legislation
– Jun 2000: a schedule of the liberalisation of international capital
flows was accepted
– Jul 2002: a new Bank of Slovenia Act
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Slovenia as EU Candidate Country
• Preparation for the adoption of the euro (obligatory after
joining the EU)
• Main task: to bring the rates of price growth in line with the
level of Maastricht criterion before the accession to the EU and
formation of a long-term and sustainable exchange rate of tolar
against the euro  macroeconomic balances and stability
• Main challenge: how to control inflation at a fixed exchange
rate regime and liberalised international capital flows
• Monetary policy is one of the key factors in decreasing the
price growth
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Fulfilment of Maastricht criteria
as of September 2001
Convergence Slovenia
criterion
Inflation (in %)
3.3
8.2
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Long-term interest rates (in %)
6.92
13.96
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Deficit (in % of GDP)
-3.0
-2.3
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Public debt (in % of GDP)
60.0
25.1
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November 2001: adopted the Medium-term Monetary Policy Framework –
with goal to enter the EMU as soon as possible (Banka Slovenije)
November 2003: adopted the Programme for ERM II Entry and Adoption of
the Euro (Banka Slovenije and Slovenian government)
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Inflation
HCPI - Inflation (y-o-y, %)
12
10
8
6
4
2
0
jan.96
jan.98
jan.00
jan.02
jan.04
jan.06
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Interest Rate Transmission Channel
Normal conditions: with changing the interest rates of the
monetary policy instruments it is possible to control the growth
of monetary aggregate M3
Slovenia: possible to control M1, but not M3
Reasons:
– use of indexation of the lending and deposit interest rates  slow
adjustments in cost of refinancing commercial banks at the central bank
– surplus structural position in the money market  banks can manage
liquidity independently (with changes in the assets side of the balance,
not in the liabilities side)
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Exchange Rate Transmission Channel
General: Changing the intervention foreign exchange rates,
foreign exchange buying/selling
Slovenia: Banka Slovenije controlled the dynamics of the
foreign exchange market rate growth
• controlled imported prices influenced on the growth of the CPI
• influence also on borrowings of companies and banks abroad 
indirect influence on total credit supply for financing domestic demand
• defined the relative price ratios of domestic and foreign goods and
services  impact on external economic balance
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Tolar vs € Exchange Rate
Spot exchange rates
250
240
Tolars per 1 EUR
230
220
210
200
190
180
170
jan.99
jan.00
jan.01
jan.02
jan.03
jan.04
jan.05
jan.06
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Operational Monetary Policy (pre EU)
Two pillars strategy (since Nov 2001):
Monetary aggregates
Real economic activity indicators
liquidity of the banking system
balance of payments
short-term interest rate trend
foreign interest rates and interest rate
difference
structure of monetary aggregates
foreign exchange rate
credit activity of commercial banks
wages in the economic and public sector
price rises under the control of
government
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Restrictions in Conducting Monetary Policy
• Liberalisation of credit operations  requires systemic
regulation and supervision of foreign exchange and liquidity
risk management
• Underdeveloped foreign exchange and tolar money market
 ineffective transfer of information from BS to real sector
• Structural position in the money market  prevents fast
development of money market operations
• Minimum reserves system  high cost of financial
intermediation of commercial banks
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Structural Position and Liquidity Gap
500
0
million €
SIT
-500
-1000
-1500
-2000
-2500
-3000
-3500
Structural position
Liquidity gap / net instruments
Tolar bills
-4000
-4500
jan.95 nov.95 sep.96 jul.97
Loans and repo
maj.98 mar.9 jan.00 nov.00 sep.01
jul.02 maj.03 mar.0
jan.05 nov.05 sep.06
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Implementation Tools
Two groups of tools for implementation of the monetary and
exchange rate policy
1. Group of instruments
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2.
foreign exchange rate dynamics  maintaining external balance
interest rates on a temporary sale or purchase of the foreign
exchange to or from Banka Slovenije  influence on the volume
of base money
standing facilities, open market operations, minimum reserves
Group of measures
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capital adequacy directive  avoided exposure of banks to
foreign exchange risks
tolar and foreign exchange liquidity ladder  avoided liquidity
risk
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Monetary Policy Instruments
Instrument
Type
Repurchase
agreement
Maturity
Frequency
Liquidity
Open market one week
operation
daily
providing
Lombard
loan
Standing
facility
unlimited
access
providing
Tolar
denominated
bills
Open market 60 / 270 days unlimited
absorbing
operation
access / weekly
Overnight
deposit
Standing
facility
overnight
overnight
unlimited
access
absorbing
Accepted collateral: Banka Slovenije’s bills & long-term deposit, Republic
of Slovenia treasury bills
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Minimum Reserves
Gradual alignment to the ECB regulations:
• lowering the rates of reserves to the ECB levels
– sights deposits (from 12% in 2001)
– fixed term deposits (from 6%, 2% and 1% – depending on maturity, in
2001)
• adjustment of the basis for the computation
– according to the maturity
– equalising the treatment of the tolar and foreign exchange obligations
• the increase of the interest rate
– from 1% to a market level
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Interest Rates Convergence
12
%
11
60-day bill
10
O/N deposit
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SIONIA
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Lombard rate
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7-day repo
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5
4
3
2
1.jan.02
1.jan.03
1.jan.04
1.jan.05
1.jan.06
1.jan.07
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Operational Basis of Exchange Rate Actions
Large capital inflows and the resulting excess liquidity 
active exchange rate policy operations
Three main elements:
• agreement between Banka Slovenije and banks (“Bank Club”)
• temporary purchases of foreign currency by Banka Slovenije –
7-day foreign currency swap (temporary monetisation of
foreign currency inflows)
• sterilisation operations through the issuance of the tolar
denominated central bank bills (60 and 270 day maturity)
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After Accession to the EU
General: countries have to accede to the ERM II mechanism
ERM II: rate of national currency is set against the euro (central
parity rate) – allowed fluctuation 15% (standard fluctuation
band), exchange rate intervention
Conditions for accession to the EMU: fulfilled nominal
convergence criteria based on Maastricht criteria:
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price stability
long-term interest rates
general government deficit / public debt
participation in the ERM II mechanism for at least two years
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Slovenia in the ERM II
• period: 28 Jun 2004 – 31 Dec 2006
• monetary policy in line with the maintenance of the stability of
the nominal tolar exchange rate
• central parity rate: 1 € = 239.640 SIT
– lower point: 203.694 SIT
– upper point: 275.586 SIT
• calculated average deviation rate: 0.05%
• no major excess of supply or demand of foreign exchange 
central rate was at a level sustainable in a long-term
• small deviations  no need for intervention
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Transition to the Eurosystem (1)
Structural adjustments to ease the transition:
• replacement of 270-day tolar bills with long-term deposit as a
sterilisation instrument
– maturities in 2007
– floating interest rate: 0.2% above 60-day tolar bill
• final abolition of the minimum foreign currency liquidity
requirement and replacement of swaps with outright purchases
of foreign exchange (final abolition of € and $ denominated
bills)
• final adjustment of the reserve requirement instruments to the
arrangements in the euro area
– excess liquidity had to be placed in a long-term deposit
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Transition to the Eurosystem (2)
Structural adjustments to ease the transition (continued):
• issuance of short-term deposit for the purpose of providing
collateral for euro cash
• issuance of 120-day tolar bills with maturities up to the end of
April 2007 for the purpose of better planning liquidity by the
banks
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Slovenia in the Eurosystem
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Accession to the EMU: 1 Jan 2007
Introduction of the € and abolition of the Slovenian tolar
Irrevocably fixed exchange rate: 1 € = 239.640 SIT
Common monetary policy in whole euro area
Final national goal: to fulfil the real convergence
– GDP per capita
– price levels
– structural reforms
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