Prepared by Andreas Westphal.
Since the abolishment of the maximum bid rate, the two-week repo rate declined by almost 100 basis points. This decline was not accompanied by a public statement by the NBS on its policy intentions.
With the NBS using repo rates for anchoring the formation of interbank interest rates at two different points on the yield curve, the latter does not necessarily reflect market expectations about future inflation and future interest rate conditions. Consequently, giving up this practice would provide valuable additional information for monetary policy.
At this juncture, the unambiguous signaling of fixed rate tenders may outweigh the benefits of variable interest rate tenders that primarily consist of (i) fostering market development by creating incentives for banks to improve their liquidity projections and portfolio management; and (ii) providing information to the central bank about the banks’ interest rate expectations liquidity needs. A transition from fixed rate to variable rate tenders may be warranted in the event of overbidding or underbidding, possibly resulting from expectations of interest rate adjustments.
While Komercijalna Banka also accounts for a sizeable share of the repo market, it was so far lacking the relatively easy access to foreign borrowing. However, this is about to change owing to the recent acquisition of a controlling minority stake in this bank by the EBRD.