The main purpose of liquidity management is to steer short-term money market interest rates to attain price stability. Specifically, changes in short-term rates are transmitted to longer-term interest rates and ultimately influence aggregate demand and price levels.
An accurate liquidity forecast is necessary to reach the desired short-term interest rate on the interbank money market. Based on the forecast, the NBG supplies the liquidity to the market via refinancing operations, ensuring that the interest rates are close to the monetary policy rate. If the interbank interest rate is above the monetary policy (refinancing) rate, the NBG increases liquidity supply to the market until the interbank interest rate and the refinancing rate are equalized. When money market rates are below the desired level, the NBG reduces the supply of liquidity through refinancing operations.
The National Bank of Georgia conducts refinancing operations by means of one-week refinancing loans to affect the liquidity position of banks. The refinancing operations are conducted through auctions held once a week. The loan portfolios of commercial banks, guarantees of international organizations and/or CD’s or government securities can be used as collateral. However, only loans denominated in the national currency are eligible as collateral. The auction volume is announced one day in advance based on the liquidity forecast.
The Monetary Policy Committee sets the minimum interest rate for the auction. This rate represents the operational target and where the interbank market rate should be.
The NBG uses the TIBR1 and TIBR7 indices as representative statistics for the money market rate. TIBR1 is the weighted average rate of interest on overnight interbank unsecured loans and TIBR7 is the weighted average rate of interest on interbank loans with up to one week maturity (excluding overnight loans). These two indicators reflect the conditions on the local money market as the maturities of most interbank loans are distributed between one and seven days. The NBG publishes the TIBR rates on its website on a daily basis at around 13:00.
For estimating the short-term liquidity shortage of the banking system, the National Bank of Georgia constructs a liquidity forecast. This forecast identifies the level of intervention necessary to reach the desired interest rate on the short-term interbank money market. By supplying liquidity and reducing excess liquidity, the National Bank of Georgia influences the liquidity position to avoid a temporary liquidity imbalance. The NBG uses one-week refinancing operations to affect the liquidity position of banks. Decisions about refinancing are based on the liquidity forecasts.
The liquidity forecast group is responsible for formulating the liquidity forecasts. The team consists of specialists from the macroeconomic research, monetary policy and monetary operations divisions. The Monetary Policy Committee sets general limits for the monetary forecast group (for instance, the maximum volume of refinancing operations and the preliminary dates for the auctions).
The liquidity forecast group gathers the information on a regular basis and makes a weekly assessment of the liquidity. Decisions about the refinancing loans to be auctioned are made one day before the auctions and are delivered to banks. Depending on demand, the auctioned amount can be fully or partially allotted.