The money market is central to the implementation of monetary policy
News, Staff memo In a new staff memo, the authors show that interest rates in the money market were affected in the way that could be expected when the Riksbank raised the policy rate in 2022 and 2023. The staff memo also illustrates transaction patterns, activity levels and interest rate levels in the Swedish money market on the basis of unique data collected by the Riksbank from its monetary policy counterparties.
The money market is the market for instruments with a maturity of up to one year, with no coupon payments or other similar cash flows until maturity. The market fulfils a variety of functions for its participants. For instance, it enables the balancing of temporary liquidity imbalances between participants needing to place liquidity and those needing to borrow liquidity. The Riksbank indirectly sets the framework for this liquidity balancing by determining interest rates in its operational framework. This determines the monetary policy counterparties’ opportunity costs for liquidity management. In this way, the Riksbank stabilises the shortest market rates close to the policy rate. The money market is thus the first stage in the transmission of monetary policy and is therefore of central importance to the Riksbank.
The monetary policy conducted by the Riksbank during the 2022-2023 rate hike cycle had the expected impact on the money market. The authors show that money market rates generally changed to the same extent as the policy rate. The transmission from monetary policy to money market rates is judged to have been favourable during the period. The Riksbank's monetary policy also affected the money market in other ways, for example by reducing the banking system’s liquidity surplus in line with the reduction in the Riksbank's holdings of securities in Swedish kronor.
For a few years now, the Riksbank has been collecting data on executed money market transactions from its monetary policy counterparties. The staff memo uses this unique dataset, and other data sources as needed, to shed light on what transaction patterns and activity levels look like in the money market, and on how interest rate formation works with regard to the instruments with the shortest maturities. The focus is on the part of the money market that can be considered the market for liquidity balancing, i.e. maturities of up to just over a week.
Authors: Sabina Colakovic, Ingrid Wallin Johansson and Max Brès, all working in the Monetary Policy Department
Staff memo
A staff memo provides Riksbank staff members with the opportunity to publish advanced analyses of relevant issues. It is a staff publication, free of policy conclusions and individual standpoints on current policy issues. Publication is approved by the head of department concerned. The opinions expressed in staff memos are those of the authors and should not be regarded as the Riksbank’s standpoint.