Open market operations
Open market operations are monetary policy tools which are an indirect way of influencing short-term interest rates by providing and absorbing short term liquidity.The refinancing loans, 1-month open market operations, certificates of deposit (CD) of the National Bank of Georgia and treasury securities are used to manage liquidity. In particular the NBG absorbs medium-term liquidity from the banking system. At the same time, issuing CDs and treasury securities stimulates money market development.
In September 2008, the National Bank of Georgia introduced a new monetary policy instrument - one-week refinancing loans. When needed the National Bank of Georgia supplies short-term liquidity to the country’s banking system through this policy instrument.
The refinancing instrument is intended to manage short-term interest rates on the interbank money market. The National Bank of Georgia is the only supplier of short-term liquidity on the Georgian lari market which makes it capable of attaining the desired interest rate on the interbank market.On a weekly basis, the liquidity forecast group estimates the short run liquidity deficit in the banking system. Based on the forecast, the NBG announces an auction for a specific amount of refinancing loans and local banks have the right to participate in that auction. NBG certificates of deposit, government securities, local currency denominated bonds issued by international financial institution, local currency denominated bonds issued by resident and non-resident legal entities and the commercial banks’ selected own credit assets in the national currency can be used as collateral. The interest rate on a refinancing loan is defined according to the monetary policy rate (and is no less than that).
In December 2016, the National Bank of Georgia introduced a new monetary policy instrument - one-month open market operations. When needed the National Bank of Georgia supplies short-term liquidity to the country’s banking system through this policy instrument.
Similar to other open market operations, the goal of the one-month open market operations is to manage short-term interest rates on the interbank money market, which is in line with international best practice and recommendations of technical assistance mission of IMF.
On a monthly basis, the liquidity forecast group estimates the short run liquidity deficit in the banking system. Based on the forecast, the NBG announces an auction for a specific amount of one-month open market operations and local banks have the right to participate in that auction. NBG certificates of deposit, government securities, local currency denominated bonds issued by international financial institution, local currency denominated bonds issued by resident and non-resident legal entities, commercial banks’ selected own credit assets in the national currency and FX deposits placed at NBG can be used as collateral.
The NBG has been issuing CDs since September 2006 to absorbs excess liquidity from the banking system for the medium term. Certificates of deposit are issued through auctions in which commercial banks have the right to participate in. The CDs are denominated in the national currency and the auctions are based on a multi price method.
Currently, the National Bank of Georgia offers 3-month certificates of deposit. The NBG Certificates of Deposit can be under the ownership of commercial banks and international financial institutions. On the primary NBG auctions for CDs, international financial institutions can purchase these securities only through commercial banks.
To provide the necessary liquidity to the banking system, the NBG also uses open market operations in the secondary market. Namely, the NBG purchases government securities on the secondary market. Unlike the regular operations, where liquidity with one-week and one-month maturities are supplied, the purchase of securities on the secondary market allows the NBG to supply the banking system with longer term liquidity, tailored to the maturity needs of the market. Operations on the secondary market are carried out by auctions that take place every Wednesday. Only commercial banks can participate in these auctions. One day prior to the auction, the NBG sends notification to all commercial banks about the auction that includes information about the auction date, time, the volume of securities to be purchased/sold, their maturity, settlement and repayment dates, and time and means of bids to be made. Every week, based on the methodology for calculating the GEL yield curve, the theoretical benchmark interest rate is calculated and determined for each treasury securities.