In order to achieve price stability as the main objective of the monetary policy, the National Bank uses various monetary instruments. Having in mind that the relationship between the instruments and the ultimate goal of the monetary policy is complex and indirect with a time lag, the National Bank monitors the movement of certain economic variables - operational and intermediate targets. Operational targets are more easily controlled, but they are afar from the ultimate objective, while the intermediate targets are more difficult to control, but they are closer to the ultimate objective. By managing the level of the interest rates, and hence the level of liquidity in the banking system, the National Bank strives to influence the level of the exchange rate, as an intermediate target of the monetary policy.
Most flexible of the National Bank instruments are the open market operations, which, depending on the liquidity in the overall banking system, could be carried out by issuing National Bank securities - CB bills auctions, or by temporary or outright purchasing or selling securities. Reserve requirement is a standard instrument through which the National Bank directly influences the money and credit supply. In order to overcome the short-term liquidity shortage of the banks at the end of the day, the National Bank extends overnight credit. In conditions of short-term excess liquidity, banks may place funds with the National Bank in overnight deposit facility and in seven-day deposit facility.
Monetary policy instruments:
Liquidity of the banking system