(C) Effects of the minimum reserves change

The central bank reigned by a currency board has one useful, intimidating and powerful tool to control the money supply – the required minimum reserves. For a better analysis of the impacts of the reserves rate change, one needs to know whether this measure is a temporary, anti-crisis one or a long-term, fundamental one.

One potential direct effect of the release of those liquid assets in the banking system would be some downward shift in the short-term interest rates on the inter-bank market. I personally fear that an insignificant part of those BGN 1 bill. will actually enter the economy in terms of business loans and foster the interest income of the banks. Even less probable seems any capital market intervention, having in mind the liquidity thirst the banks suffer from.

The end-effects would most probably sum to stabilization of the inter-bank market and eventually to certain financial account outflow.