The main purpose of liquidity management is to steer short-term interest rates in the interbank money market. By regulating interest rates, the National Bank of Goergia achieves its goal of price stability. Specifically, changes in short-term interest rates are transmitted to longer-term interest rates, which eventually affect aggregate demand and prices.
Liquidity demand forecast helps achieve the desired short-term interest rate on the interbank money market. The NBG then supplies the liquidity to the market via refinancing operations, ensuring the formation of the desired interest rate, equal to the monetary policy rate.
If the interest rate at the interbank money market exceeds the monetary policy rate, the NBG increases liquidity supply to the market through refinancing loans until the interbank interest rate approaches the policy rate and vice versa, if the interest rate is lower than the policy rate, the NBG reduces the supply of liquidity through refinancing loans.
The NBG supplies luqidity in the form of refinancing loans through auctions, held once a week. Commercial banks can only take refinancing loans against good collateral, which includes part of their loan portfolio, bonds issues by international financial institutions and/or certificates of deposit or government securities. Only loans denominated in national currency are used as collateral for refinancing loans. The volume of the auction is announced the day before, based on the liquidity forecast.
The Monetary Policy Committee sets the minimum interest rate for the auction. This rate is also the operating target rate. The interbank money market rate should move around the operating target rate.
The NBG uses the TIBR1 and TIBR7 indicators as statistics representing money market rates. TIBR1 represents the weighted average interest rate on overnight, unsecured interbank loans, and TIBR7 - interbank loans with the maturity of up to one week (excluding overnight loans). These two indicators clearly reflect the situation in the local money market, as the term of loans in the interbank market mainly ranges from 1 to 7 days. The NBG publishes daily TIBR rates on its website at around 1 p.m.
For liquidity forecasting the NBG assesses the short-term liquidity deficit of the banking system in order to determine the amount of liquidity supply required to achieve the desired short-term interest rate in the interbank market. The impact on the liquidity position serves to eliminate the temporary liquidity imbalance by supplying liquidity to the banking system or reducing excess liquidity. To achieve this goal, the NBG uses one-week refinancing operations. Decisions on refinancing volumes are made on the basis of liquidity forecast.
Liquidity forecasting is delegated by the Monetary Policy Committee to the Liquidity Forecast Team, composed of professionals from the Macroeconomic Research, Monetary Policy and Monetary Operations Divisions. The Monetary Policy Committee sets general limits for the liquidity forecast team (such as, for example, the maximum volume of refinancing operations and the preliminary dates for auctions).
The Liquidity Forecast Team collects information regularly and conducts short-term liquidity assessments on a weekly basis. The decision on the amount of loans to be auctioned is made one day before the refinancing auction, and the banks are informed duly. The loans put up for auction can be placed in full or in part, based on the bank demand.