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CBCG Monetary Policy Instruments
The Central Bank of Montenegro Law (OGM 40/10, 46/10, 6/13 and 70/17) sets out the primary CBCG monetary policy instruments:
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Open Market Operations
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Credit Operations
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Reserve Requirements
In addition, the Law sets out that, in the achievement of its objectives and the exercising of its functions, the Central Bank may decide on the use of other monetary policy measures and instruments.
Open Market Operations
Open market operations are an indirect monetary policy market instrument which the CBCG uses to purchase and sell securities in order to regulate the banking sector’s liquidity. Moreover, open market operations affect the amount and the structure of interest rates, banks’ lending potential and lending activity, and consequently the country’s economic activity.
Open market operations are a monetary policy instrument by which the CBCG purchases and sells securities issued by Montenegro, EU Member states and international financial institutions, or other securities it deems acceptable for this purpose.
The CBCG may perform open market operations through spot trading contracts. The CBCG may perform purchase or sale of securities through direct trade with a certain bank through forward contracts.
The CBCG may perform the purchase and sale of securities as:
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Permanent open market transactions - the purchase and sale of securities without the obligation of their repurchase or resale
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Repurchase (repo) transactions - the purchase and sale of securities in which a seller agrees to sell securities to a buyer, and the latter agrees to pay the purchase price to the former, subject to the commitment of the buyer to resell the securities to the seller and the commitment of the seller to repurchase the securities from athe buyer at the specified future date and at the predetermined repurchase price.
Although the Law enables the CBCG to perform open market operations, this monetary policy instrument has not been used so far, since sound banking sector and macroeconomic stability have so far not requested the activation of this instrument.
Decision on Open Market Operations: Decision on Open Market Operations (OGM 15/11)
Credit Operations
In the case of their liquidity needs, the CBCG may grant the liquidity loan to banks in the form of:
The Central Bank may grant the liquidity loan provided that the bank is solvent and that loan has been secured by securities issued by the State of Montenegro, EU Members States and international financial institutions or other collateral deemed acceptable by the Central Bank, except immovable properties. The nominal value of securities, i.e. the market value of other security assets, offered as security for the liquidity loan shall be no less than 110% of the loan value. In case the market value of securities and other collateral offered as security against the liquidity loan has fallen by more than 5 percentage points of the initially agreed percentage for collateralising the loan, the bank shall, at the Central Bank’s request, provide the additional collateral or return a portion of the liquidity loan.
A bank may apply for an intraday liquidity loan if it is lacking funds in its account to meet all its due liabilities during a working day. The bank may use intraday loan provided that it has used 50% of allocated reserve requirements for maintaining daily liquidity. The Central Bank shall charge interest on the granted intraday loan at the annual rate of 1.5%.
The bank shall repay the intraday loan to the Central Bank on the same working day, no later than by the expiry of time envisaged for the exchange of payment transaction messages in accordance with the RTGS system. If the bank fails to repay the intraday liquidity loan by the expiry of time envisaged, the CBCG grants the overnight liquidity loan to the bank, without the latter’s request, in the amount of the non-repaid portion of the intraday liquidity loan.
The CBCG grants overnight liquidity loan to a bank, if bank by the expiry of time envisaged for the exchange of payment transaction messages is lacking funds in its account to meet all its due liabilities. The Central Bank shall charge interest on the granted overnight loan at the annual rate of 2%.
The bank is obliged to repay the overnight liquidity loan and the pertinent interest to the CBCG until 10:00 hours on the subsequent working day. If the bank fails to repay the overnight liquidity loan until the specified deadline, the CBCG charges the bank the statutory default interest, for the period beginning from the maturity date until the collection of the overnight loan.
The CBCG may grant the short-term liquidity loan to a bank experiencing temporary difficulties in liquidity maintenance. The CBCG may grant the short-term liquidity loan to a bank for the period not exceeding 180 calendar days. The bank shall repay the short-term loan to the Central Bank by the expiry of time envisaged for the exchange of payment transaction messages in accordance with the RTGS as at the due date.
The Central Bank may sign once the agreement on the renewal of short term loan under the same conditions, for additional period of maximum of 180 days, with the bank with which it has previously adopted the agreement for resolving illiquidity problems, which the Central Bank assesses as acceptable.
The Central Bank shall charge interest rate on the granted short-term loan at the annual rate of 2.5%, and it shall increase it by 0.5 percentage points in the case of approving the renewal of the short-term loan. If the bank fails to repay the short-term liquidity loan at the agreed date, the CBCG charges the bank the statutory default interest.
Decision on detailed conditions for granting loans to banks in case of their liquidity needs (OGM 82/17).
Reserve Requirements
Primary instrument of the CBCG monetary policy is reserve requirements. The CBCG requires banks to deposit the reserve requirements at the Central Bank accounts (in the country and/or abroad).
Due to specificities of the Montenegrin economy, the CBCG uses the reserve requirements instrument to primarily affect banking system liquidity, i.e. it has an indirect impact on the banking system’s stability and its confidence. With this instrument, the CBCG also affects the banks’ lending activity and indirectly to the further process of money multiplication (the money offer) in the economy. Moreover, the change in the reserve requirements instrument may affect the deposits’ maturity structure.
The base for calculating reserve requirements comprises demand and time deposits, except central bank deposits. The reserve requirement rate is 7.5% on a part of the base comprised of demand deposits and deposits with the agreed maturity up to one year (365 days) and 6.5% on a part of the base comprised of deposits with the agreed maturity over one year. Banks shall deposit the calculated reserve requirements to the reserve requirement account in the country and/or at the CBCG accounts abroad, and they may not allocate or deposit reserve requirement in any other form. The reserve requirement is allocated in EUR. The Central Bank shall pay monthly remuneration to banks on 50% of their reserve requirements funds that is to be calculated at the EONIA rate minus 10 basis points on annual basis until the eighth calendar day in the current month for the previous month, provided that this rate may not fall below zero.
Calculation period is a monthly period, from the first until the last calendar day in the respective month, in which a bank is obliged to calculate the base. The maintenance period is monthly period, from the third Wednesday in the respective month until the day preceding the third Wednesday of the following month, over which a bank is obliged to maintain the prescribed reserve requirement.
If bank fails to allocate the reserve requirements in at the prescribed amount and deadline, it shall pay monthly fee for the miscalculated or failed to timely allocate of the reserve requirement, at the annual interest rate of 12%.
A bank may use up to 50% of its reserve requirement deposits to maintain its daily liquidity; it shall not be charged any interest if it returns the funds at the end of the same day, and if it fails to return it at the end of the same day, it shall pay interest to the CBCG at the annual interest rate of 12%.
Decision on Bank Reserve Requirement to be Held with the Central bank of Montenegro (˝Official Gazette of MNE“, no. 88/17).
The reserve requirements instrument was changed several times since the CBCG has been established.
The base for calculation of reserve requirements
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Since January 2018: demand and time deposits, except central bank deposits;
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Since October 2011: demand and time deposits;
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From February 2009 to October 2011: demand and time deposits;
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From January 2008 to February 2009: average weekly amount of deposits by public sector, regardless of their maturity, of demand deposits by other sectors and of time deposits by other sectors with maturity less than 2 years, by applying different reserve rates;
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From April 2006 to January 2008: average weekly amount of demand deposits and of time deposits with maturity less than 1 year, by applying different reserve rates;
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From mid-August 2004: average weekly amount of demand deposits and of time deposits with maturity of up to 30 days;
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From April 2003 to August 2004: average two-week amount of demand deposits and of time deposits with maturity of up to 30 days;
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From January 2002 to April 2003: average two-week amount of demand deposits and of other time deposits in other currencies.
Reserve requirements rate
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Since March 2017: 7.5% on a part of the base comprised of demand deposits and deposits with the agreed maturity up to one year (365 days) and 6.5% on a part of the base comprised of deposits with the agreed maturity over one year (over 365 days)
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Since October 2011 to March 2017: 9.5% on a part of the base comprised of demand deposits and deposits with the agreed maturity up to one year (365 days) and 8.5% on a part of the base comprised of deposits with the agreed maturity over one year (over 365 days)
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From June 2009 to October 2011: 10%
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From February 2009 to June 2009: 11%
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From January 2008 to February 2009: 19% on deposits by public sector, regardless of their maturity, on demand deposits and to time deposit by other sectors, which maturity, on the days for the reserve requirement calculation, is less than 180 days, and 2% on time deposits by other sectors, which maturity, on the days for the reserve requirement calculation is over 180 days but less than two years
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From April 2006 to January 2008: 19% on demand deposits and time deposits with maturity, on the days for calculation of reserve requirement, less than 90 days, a 5% to time deposits with maturity, on the days for calculation of reserve requirement, over 90 days but less than one year
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From April 2003 to April 2006: 23% on demand deposits and on time deposits with maturity of up to 30 days
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From November 2002 to April 2003: 50% on demand deposits
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From July to November 2002: 60% on demand deposits
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From March to July 2002: 70% on demand deposits
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From January to March 2002: 80% on demand deposits
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Until January 2002: 100% on demand deposits
Allocation of reserve requirements
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From March 2017: at the reserve requirement account in the country and/or at the Central Bank accounts abroad;
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From January 2016 to March 2017: at the reserve requirement account in the country and/or at the CBCG accounts abroad, up to 25% of their reserve requirements in T-bills issued by Montenegro of any maturity;
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Since end-February 2015: at the reserve requirement account in the country and/or at the CBCG accounts abroad, up to 25% in T-bills issued by Montenegro regardless of their maturity, and subsequently additional 10% in T-bills issued by Montenegro with maturity up to 182-day;
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Since January 2015: at the reserve requirement account in the country and/or at the CBCG accounts abroad, up to 35% in the form of T-Bills issued by Montenegro with maturity up to 182 days;
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Since January 2014: at the reserve requirement account in the country and/or at the CBCG accounts abroad, up to 30% in the form of T-Bills issued by Montenegro with maturity up to 182 days and up to 13% in the form of T-Bills issued by Montenegro with maturity up to 91 day;
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Since April 2012: at the reserve requirement account in the country and/or at the Central Bank accounts abroad; up to 35% in the form of T-Bills issued by Montenegro
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From June 2009: at the reserve requirement account in the country and/or at the Central Bank accounts abroad; up to 25% in the form of T-Bills issued by Montenegro
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From February 2009 to June 2009: at the reserve requirement account in the country and/or at the Central Bank accounts abroad; up to 20% in the form of T-Bills issued by Montenegro
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From January 2008 to February 2009: at the reserve requirement account in the country and/or at the Central Bank accounts abroad
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From April 2006 to January 2008: at the reserve requirement account in the country and/or at the Central Bank accounts abroad; up to 10% in the form of T-Bills issued by Montenegro
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From April 2003 to April 2006: at the reserve requirement account in the country and/or at the Central Bank accounts abroad; up to 25% in the form of T-Bills issued by Montenegro
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From 2002 to April 2003: at the reserve requirement account in the country; up to 10% in the form of T-Bills issued by the Republic of Montenegro.
Interest rate to allocated reserve requirements
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From March 2017: the CBCG pay monthly fee to the bank on 50% on its reserve requirements funds to be calculated at the EONIA (Euro OverNight Index Average) rate minus 10 basis points on annual basis until the eighth calendar day in the current month for the previous month, provided that this rate may not fall below zero;
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From January 2016 to March 2017: on the amount representing the difference between 50% of total reserve requirement funds and the amount of funds allocated in the form of Tbills, a maximum of 25% of total reserve requirement funds allocated Central Bank shall pay monthly remuneration to banks, until the eighth calendar day in the current month for the previous month, calculated at the EONIA (Euro OverNight Index Average) rate minus 10 basis points on annual basis, provided that this rate may not fall below zero;
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Since January 2015: the CBCG pay monthly fee to the bank on 15% on its reserve requirements funds to be calculated at the EONIA (Euro OverNight Index Average) rate minus 10 basis points on annual basis, provided that this rate may not be lower than zero;
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Since January 2014: the CBCG pay monthly fee to the bank on 7% on its reserve requirements funds to be calculated at the EONIA (Euro OverNight Index Average) rate minus 10 basis points on annual basis, provided that this rate may not be lower than zero.
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From January 2013: The Central Bank shall pay monthly fee to the bank on 15% of its reserve requirements funds, at the EONIA (Euro OverNight Index Average) rate minus 10 basis points on annual basis, provided that this rate may not be lower than zero
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Since April 2012: the CBCG pays monthly fee to the bank on 15% of reserve requirements funds, at the rate of 1% on annual basis
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From June 2009: the CBCG paid monthly fee to the bank on 25% of reserve requirements funds, at the rate of 1% on annual basis
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From February 2009 to June 2009: the CBCG paid monthly fee to the bank on 30% of reserve requirements funds, at the rate of 1% on annual basis
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From January 2008 to February 2009: the CBCG paid monthly fee to the bank on 50% of reserve requirements funds, at the rate of 1% on annual basis
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From April 2006 to January 2008: the CBCG paid monthly fee to the bank on 40% of reserve requirements funds, at the rate of 1% on annual basis
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From April 2003 to April 2006: the CBCG paid monthly fee to the bank on 25% of reserve requirements funds, at the rate of 1% on annual basis
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From July 2002 to April 2003: the CBCG paid monthly fee to the bank on 40% of reserve requirements funds, at the rate of 1% on annual basis
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From January to 1 July 2002: the CBCG did not pay interest to reserve requirement funds deposited at the reserve requirements account.
Interest rate to miscalculated or not-allocated reserve requirement
Conditions to use reserve requirements for liquidity:
A bank may use up to 50% of its reserve requirement deposits to maintain its daily liquidity free of charge, if it returns the funds by the end of the same day. The CBCG calculates monthly interest on the unpaid amount of the reserve requirement:
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Since October 2011: at the annual interest rate of 12%;
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From June 2009 to October 2011: at the annual interest rate of 7%;
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From April 2006 to June 2009: at the annual interest rate of 11%;
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Until April 2006: at the annual interest rate of 12%.
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