Central banks and interest rates (part 2)

The second part of the article about the central banks and interest rates, a more detailed look at the mechanisms of influence of interest rates in the economic system, tap the interbank market. The central bank of any country in the world has in its arsenal of 3 time-proven tool that can regulate the amount of monetary assets in circulation, the influence on the activity of the total market.

NORMA MANDATORY RESERVATION
This percentage, which must be taken to the accounts of the central bank with deposits received by a commercial bank. When reserving 5% of the norm (for example), the commercial bank must keep in reserve 5 million if the volume of deposits is equal to 100 million

Height regulations backup: most of the money a commercial bank, which came in the form of deposits, the account goes on rezervva. This reduces the possibility of the bank on the money multiplier (Animation - the effect of which is achieved by a continuous transfer of assets from bank to bank, which formally increases the amount of money in circulation), which leads to a decrease akivnosti in the money market. This helps to reduce demand and reduce inflation.

Reduction rules of reservation: mechanism of action completely opposite.
The global currency market, perhaps, is the least powerful tool for the CB, as the rule of reservation - this domestic instrument, and its impact rarely goes beyond the region.

The interest rate on loans CENTRAL BANK
This is the most powerful tool that is available today. In economically developed countries of the Central Bank of the money in commercial banks is quite high. The interest rate on this money means the cost of borrowing. in other words, how many would pay a commercial bank for central bank money. The mechanism of the loan in each country is different, but we are more interested in the interest rate on such loans.

Growth rates: The most popular mechanism of CB in the recent past. The growth rate increases the price of the money that commercial bank wants to take a loan from the Central Bank. The amount of the loan is reduced, thus decreasing the amount of assets in circulation. The decrease of assets in the market leads to a cooling of the money market, and reduces demand, which leads to attenuation of the inflation rate. The situation of rapid growth rates we are seeing in the United States. But growth rates in the States is quite different connotations. need to cover a huge deficit in the trade and balance of payments. In the United States decided to do so through its own bond market (below). Raising interest rates is accounted for by the way in time of rising oil prices.

Reducing interest rates on credit: The mechanism completely opposite. The last few years, the Central Bank have used the mechanism of reducing interest rates on their own money. This was particularly evident after the 1998 crisis, when the world economy has been stalled in development. It was one of the existing tools to activate the economy.

Operations with Bonds
This tool is most popular in the United States, as well as U.S. government bonds - the least risky asset to date. In the first part of this article, I described how the Fed raises / lowers interest rates by selling / buying of securities through the Federal Bank of New York. But such a mechanism does not always work adequately.

By the end of the causes are unknown, but known as the most probable. One of them is a large number of foreign buyers of securities (the most active buyer of American bonds. Japan (about $ 711 billion). Each of the customers has its own purpose.

Sale of bonds: lead to the seizure of assets from the market, as well as commercial banks, buying bonds, spend money, which leads to a change in the structure of assets. Sales of bonds reduces the money supply in circulation and help reduce inflationary pressures. Purchases of bonds to increase the money supply and lowering interest rates (part 1). This gives new impetus to development.

The situation in the United States today is a classic by a band of interest rates and Treasury bonds. Interest rates are rising steadily. The stakes are rising in tandem with all new and new sales of bonds. Bond market is growing. U.S. Treasury Bonds are looking for their owners. At the moment (if the volume of demand for bonds unchanged) the level of bond proposals by the Fed is constantly growing. This reduces the value of the bonds, but also increases the% of return (ie% yield and duration of the bonds are essential for investors in deciding to purchase the asset). In the last speech of Alan Greenspan sounded interesting phrase that symbolizes some inconsistencies Fed policy. rates are rising, sales of bonds to rise, but interest rates on bonds decreases (increases their value - hence the proposal is growing faster than demand (one reason)).

Hypothetically, this situation can be resolved through further sales of bonds, but this is extreme fiction, which does not work in the market. It is possible that the best minds of the U.S. now wrestle with how to put in order the market bonds and interest rates in order to easily raise the rate to 3.5%. Possibly. The problem may arise when the demand becomes great, and then to the United States will have problems with the movement of rates, because all the money obtained on credit through the bonds, you will need to give +%. But we can only guess, based on market facts.

LIBOR Interbank market AND ASSETS
To date, rate LIBOR (London Interbank Offered Rate) is the main indikativom in the credit markets around the world. This rate of interest under which the biggest banks in London are prepared to give credit to their own resources. In most, the banks VVA (British Bankers. Association). The rate of LIBOR differ on the currency in which credit is granted (euro, dollar, franc). Interest rates on the interbank market you can always look in the newspaper Financial Times in the section. Markets & Companies., Or on the website www.ft.com. As of February 22, LIBOR rates were as follows: 1god (3,46%), 6 months (3.11%), 3 months (2.87%), 1 month (2.62%). Below, the graph shows the dynamics of interest rates on loans LIBOR rate for 1 year and 6 months (for the past 15 years).

Fig.1 Dynamics LIBOR rates on loans for a period of 1 year in the last 15 years.

Fig.2 Dynamics of LIBOR rate loans for a period of 6 months for the past 15 years.

Roman Pavelko