Friday, August 12, 2005
New Decisions of the Monetary Council
(Press Release form Governor’s Cabinet)
Due to the enactment of the new Law on Deposit Insurance, the NBS Monetary Council has decided at its today’s session to revise the ratio of required allocation of funds by banks in respect of the new foreign currency savings downwards by 2 percentage points, i.e. from 47 to 45 per cent. This measure by no means represents a result of the NBS estimate on now being the right time for easing monetary policy. On the contrary, the NBS advocates the view that the inflation level reported in the course of the year is quite disturbing and that it should be curbed by choosing the most adequate monetary policy instruments available. Therefore, in addition to the abovementioned measure, and on account of surging inflationary pressures, the Monetary Council has decided to raise the foreign exchange reserve requirement of banks by 3 percentage points which should result in the sterilization of additional liquidity.
The main reason behind the reduction in required depositing in respect of new foreign currency savings is the adoption of the new Law on Deposit Insurance whereby the amount of the insured deposit in commercial banks has been raised from the previously CSD 5,000 to approximately CSD 250,000 or the dinar equivalent of EUR 3,000 per each depositor. According to the Monetary Council estimates, such a significant increase in the amount of insured deposits will contribute to the further growth of new foreign currency savings, although this trend has accelerated substantially in the course of the year. Moreover, the citizens’ confidence in banks may be measured by the amount of new foreign currency savings exceeding EUR 1.8 billion. Following the June record high, newly deposited foreign currency savings rose by EUR 79.5 million which represents its greatest monthly increase from 2001 until the present day.
For the sake of reminder, with a view to provide greater security for the citizens that have placed their foreign currency deposits with banks in conditions where a relatively modest amount of these deposits was insured, the NBS introduced a new requirement reflected in the banks’ obligation to deposit with the NBS 50% of the newly deposited foreign currency savings. In May 2004, this amount was reduced to 47%, and following the adoption of the new Law on Deposit Insurance, the NBS decided to further reduce it to 45%. On enacting this measure, which was previously announced and described as conditional upon the adoption of the mentioned law, the Monetary Council did take into account the fact that the costs of banks in respect of the insurance of natural persons’ deposits with the Deposit Insurance Agency would increase. In view of the reduction of the reserve requirement on citizens’ foreign currency deposits from 47 to 45 per cent and on the basis of the current level of foreign currency savings, the NBS estimates are that the banks’ funds in the amount of CSD 2.7 billion will unfreeze, i.e. around EUR 32.2 million will be returned to banks.
This measure is aimed at reducing banks’ external borrowing, as well as the demand for foreign currency. At the same time, it is expected that banks will be additionally motivated to base their future lending on the domestic accumulation of funds through still higher amount of foreign currency savings. Positive effects of this measure which is expected to release a substantial amount of banks’ funds should be reflected on citizens as well, since now the banks will be able to reduce their lending or to increase their deposit rates.
Reviewing the implementation of monetary policy and bank liquidity within it and assessing that monetary policy should introduce additional measures with a view to reducing the inflationary pressures, the Monetary Council has decided to raise reserve requirement of banks on foreign currency deposits from 26 to 29 per cent. With this measure, the National Bank wishes to send a clear signal to banks that the basis for their lending should be the growing dinar savings, and not external borrowing.
Following the banking sector liquidity and assessing inflationary pressures, the NBS shall gradually reduce the current difference between the percentage of the banks’ required allocation in respect of new foreign currency savings and the percentage of foreign currency reserve requirement, with a view to bringing them to an even level in the foreseeable future.
The NBS shall carefully monitor the implementation of these measures and of the overall monetary policy which is to remain restrictive. At its today’s session the Monetary Council also concluded that the National Bank shall continue to curb the domestic demand and inflation by sterilizing excess liquidity through repo operations.
Due to the enactment of the new Law on Deposit Insurance, the NBS Monetary Council has decided at its today’s session to revise the ratio of required allocation of funds by banks in respect of the new foreign currency savings downwards by 2 percentage points, i.e. from 47 to 45 per cent. This measure by no means represents a result of the NBS estimate on now being the right time for easing monetary policy. On the contrary, the NBS advocates the view that the inflation level reported in the course of the year is quite disturbing and that it should be curbed by choosing the most adequate monetary policy instruments available. Therefore, in addition to the abovementioned measure, and on account of surging inflationary pressures, the Monetary Council has decided to raise the foreign exchange reserve requirement of banks by 3 percentage points which should result in the sterilization of additional liquidity.
The main reason behind the reduction in required depositing in respect of new foreign currency savings is the adoption of the new Law on Deposit Insurance whereby the amount of the insured deposit in commercial banks has been raised from the previously CSD 5,000 to approximately CSD 250,000 or the dinar equivalent of EUR 3,000 per each depositor. According to the Monetary Council estimates, such a significant increase in the amount of insured deposits will contribute to the further growth of new foreign currency savings, although this trend has accelerated substantially in the course of the year. Moreover, the citizens’ confidence in banks may be measured by the amount of new foreign currency savings exceeding EUR 1.8 billion. Following the June record high, newly deposited foreign currency savings rose by EUR 79.5 million which represents its greatest monthly increase from 2001 until the present day.
For the sake of reminder, with a view to provide greater security for the citizens that have placed their foreign currency deposits with banks in conditions where a relatively modest amount of these deposits was insured, the NBS introduced a new requirement reflected in the banks’ obligation to deposit with the NBS 50% of the newly deposited foreign currency savings. In May 2004, this amount was reduced to 47%, and following the adoption of the new Law on Deposit Insurance, the NBS decided to further reduce it to 45%. On enacting this measure, which was previously announced and described as conditional upon the adoption of the mentioned law, the Monetary Council did take into account the fact that the costs of banks in respect of the insurance of natural persons’ deposits with the Deposit Insurance Agency would increase. In view of the reduction of the reserve requirement on citizens’ foreign currency deposits from 47 to 45 per cent and on the basis of the current level of foreign currency savings, the NBS estimates are that the banks’ funds in the amount of CSD 2.7 billion will unfreeze, i.e. around EUR 32.2 million will be returned to banks.
This measure is aimed at reducing banks’ external borrowing, as well as the demand for foreign currency. At the same time, it is expected that banks will be additionally motivated to base their future lending on the domestic accumulation of funds through still higher amount of foreign currency savings. Positive effects of this measure which is expected to release a substantial amount of banks’ funds should be reflected on citizens as well, since now the banks will be able to reduce their lending or to increase their deposit rates.
Reviewing the implementation of monetary policy and bank liquidity within it and assessing that monetary policy should introduce additional measures with a view to reducing the inflationary pressures, the Monetary Council has decided to raise reserve requirement of banks on foreign currency deposits from 26 to 29 per cent. With this measure, the National Bank wishes to send a clear signal to banks that the basis for their lending should be the growing dinar savings, and not external borrowing.
Following the banking sector liquidity and assessing inflationary pressures, the NBS shall gradually reduce the current difference between the percentage of the banks’ required allocation in respect of new foreign currency savings and the percentage of foreign currency reserve requirement, with a view to bringing them to an even level in the foreseeable future.
The NBS shall carefully monitor the implementation of these measures and of the overall monetary policy which is to remain restrictive. At its today’s session the Monetary Council also concluded that the National Bank shall continue to curb the domestic demand and inflation by sterilizing excess liquidity through repo operations.
