Liquidity management operations at the National Bank of Hungary

Central banks’ liquidity management plays a crucial role in the implementation of monetary policy. In most countries central banks influence short term interest rates through determining the equilibrium conditions of supply and demand in the market for bank reserves (liquidity). This article describes the liquidity management practice of the National Bank of Hungary in the period of 1998-2001. This period is characterized by two particular circumstances. First, there is a substantial liquidity surplus, therefore the Bank influences market interest rates using the liabilities side instruments of its balance sheet. Second, as a result of the narrow-band exchange rate regime and the fact that the Treasury Account is held with the Bank, the amount of liquidity is highly volatile and hard to forecast. The article explains how the Bank forecasts liquidity and the movements of overnight interest rate in these circumstances, and it describes the development of monetary policy instruments applied by the bank.