December 9, 2022

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Norges Bank intervenes to reduce volatility in the money market: it offers new exceptional loans to banks

Norges Bank intervenes to reduce volatility in the money market: it offers new exceptional loans to banks

The Bank of Norway announced on Monday that it is in the process of coming up with new measures to mitigate fluctuations in interest rates on the money market, which, according to the bank, due to the uncertainty about the size of large tax payments due in the next few weeks, and thus about the liquidity of the entire banking system.

Thus, the central bank will provide so-called F loans from Monday until October 14, the letter said.

“In order to provide greater predictability of liquidity in the banking system, from today until October 14, 2022, Norges Bank will offer F loans with full allocation at a fixed rate of interest and with maturities of one day. The offer will continue if the situation calls for it.”

The interest rate on financial loans will be ten basis points higher than the prime rate, i.e., at 2.35 percent.

F loans are a type of loan that a Norwegian bank can give to Norwegian banks to adjust their liquidity. These loans are usually due within a few days. During the Corona crisis, this was one of the means used by the central bank to ensure that there was enough money in circulation, and then with maturities of up to one year. For the shortest loans, there was no interest rate margin relative to the policy rate, to ensure that significant reductions in the policy rate were also propagated in the money market.

Loans are usually given at auctions, where banks bid on the interest rate and amount, and Norges Bank finally sets the total amount. In this case, there will therefore be a fixed interest rate, and the banks will be able to get as many loans as they want, just as they did during the Corona crisis.

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Not resolved in a day

Nils Christian Knudsen, currency analyst at Handelsbanken, says Norges Bank’s intervention was to be expected.

– The purpose, as the Bank of Norway itself says, is: to soften the system so that short-term interest rates in the money market approach the key rate. You can’t do that now, because there are so many tax payments that banks are draining cash out of cash.

– Then the question do you want to do it, and the answer is “yes”. Norges Bank has good experience in this area, but at the same time, foreign banks do not have the same access to liquidity as Norges Bank. So the imbalance that we’re facing now, I think we should expect is going to continue for some time. It is not resolved in one day, but let’s say the liquidity position is normalized in a week or two.

Norges Bank will provide loans every day for a period, and will continue to offer if the situation calls for it.

– What Norges may have seen is that tax payments have surprised a little bit to the upside, and that you may have had slightly more undesirable effects on money market interest rates than you had imagined. It may take some time to correct

It is difficult to fully plan for this here, because there are so many factors that it is difficult to control. Perhaps the Norges Bank should have been more cautious and added liquidity earlier, but that would be in light of hindsight.

small crown strengthening

The krone strengthened slightly against the euro immediately after the Norges Bank’s announcement on Monday, but the impact was relatively small compared to previous changes in trading.

The bank wrote that the loans F-Bank Norges is publishing on Monday are in addition to normal market operations.

“The objective of the Norges Bank’s liquidity policy is to keep short-term money market interest rates close to the policy rate. Norges Bank achieves this by managing the total amount of liquidity in the banking system. In the coming weeks, structural liquidity in the banking system will be very low as a result of Large state tax payments. Uncertainty about the amount of tax payments and the level of liquidity in the banking system caused significant fluctuations in short-term interest rates in the money market”, wrote the Bank of Norway.(Conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using links that lead directly to our pages. All or part of the Content may not be copied or otherwise used with written permission or as permitted by law. For additional terms look here.