Exchange rate policy of the National Bank of the Republic of Belarus
The exchange rate policy of the National Bank of the Republic of Belarus is implemented in the managed floating regime.
The exchange rate of the Belarusian ruble is not fixed versus certain foreign currencies, as well as versus a currency basket, and the National Bank does not set any targets as to the level of the exchange rate or the rates of its change. The dynamics of the Belarusian ruble exchange rate is formed under the impact of market forces – the ratio of demand for foreign exchange and supply thereof in the domestic foreign exchange market. Having regard to the above-mentioned, a change in exchange rate may be caused by a rather wide range of factors, which make an impact on this ratio.
Thus, a change in the exchange rate of the Belarusian ruble versus individual foreign currencies (for example, the US dollar) may be caused not only by the impact of the internal factors, but related to the exchange rates dynamics in the global markets and economic situation in the countries, versus the currencies of which it is set. Use of the flexible exchange rate is a kind of “automatic stabilizer” under the impact of external shocks and lowers the impact of their negative consequences on the country’s economy.
Implementation of the National Bank’s exchange rate policy under the managed floating regime allows for carrying out of foreign exchange interventions with a view to smoothing sharp exchange rate fluctuations in the course of trades in foreign currencies at the floor of the JSC “Belarusian Currency and Stock Exchange”. The objective of the exchange rate policy is the value of the currency basket, which includes the US dollar, the euro and the Russian ruble. The mechanism of taking decisions as to carrying out transactions involving purchase and sale of foreign exchange by the National Bank is a formalized one and is regulated by the rules of the exchange rate policy of the National Bank.
The rules of the exchange rate policy of the National Bank of the Republic of Belarus
The rules of the exchange rate policy of the National Bank are a formalized and regulated mechanism of taking decisions on carrying out transactions involving foreign exchange purchase or sale by the National Bank in the course of trades at the JSC “Belarusian Currency and Stock Exchange”.
The rules of the exchange rate policy are aimed at:
- smoothing the daily fluctuations of the currency basket value;
- ensuring the positive balance of the National Bank’s transactions (excess of the volumes of foreign exchange purchase over the volumes of its sale) in the medium-term to replenish gold and foreign exchange reserves; and
- limiting daily volumes of interventions.
The rules of the exchange rate policy may be divided into two blocks:
- the key elements building up the system of corridors for the currency basket value; and
- the operational rule being the guide with respect to the volumes of interventions and the currency basket value, at which they should be made during the trading session.
The key elements incorporate:
- a central value;
- a neutral range and its bounds;
- the operational interval and its bounds; and
- a daily limit of interventions.
The corridors are formed around the central value – the calculated value forming the middle of the corridor, the change and recalculation of which is made on a daily basis and depends on the results of the previous trades. Three factors are influencing its change:
- a change in the exchange rate (an increase in the currency basket value following the results of trades leads to the shift of the central value upwards, while a decline therein results in a downwards movement);
- the interventions made (when the National Bank sells foreign exchange the central value, at the close of trading, is adjusted upwards, when purchases – downwards); and
- an adequacy of gold and foreign exchange reserves (a low level of gold and foreign exchange reserves brings about a gradual upward shift of the central value, with the level of this shift weakening as far as the reserves being accumulated).
The neutral range is the corridor, within the bounds of which the National Bank does not intervene in trades and allows the currency basket to change in a free manner.
In case of violation of the bounds of the neutral range, the currency basket value falls within the operational interval, within which the National Bank begins to carry out transactions involving purchase or sale of foreign exchange (depending on the direction of change of the currency basket value), limiting its further movement. The volumes of transactions grew up as far as the value of the currency basket moves away from its central value, and their value is determined by the operational rule. When the bound of the operational interval is reached it is allowed to use the full volume of the daily limit of interventions.
The amount of the daily limit of interventions is a calculated indicator and its change is influenced by the National Bank’s transactions carried out in the foreign exchange market. Thus, sale of foreign exchange results in the reduction of the daily limit of interventions, while purchase brings about an increase therein. At the same time, with a view to avoiding the situation when after the long periods of foreign exchange purchase the daily limit of interventions may become too excessive, its maximum value is limited. The described order of determining the daily limit of interventions makes it possible to minimize the risk of a complete loss of reserves as a result of foreign exchange sale.
Besides, the task of the daily limit of transactions lies also in the implementation of the principle “to resist, but to know when to leave”. In other words, the National Bank smoothes the fluctuations of the exchange rate, but in case of occurrence of considerable pressure it will not defend this or that level thereof at whatever the cost, but will allow the market forces to determine it themselves.
In extreme situations, when sharp and considerable fluctuations of the exchange rate bear threat to the financial stability and stable functioning of the markets, an additional limit of interventions may be provided, but only in the case when the daily limit was used in full.
FREQUENTLY ASKED QUESTIONS (FAQ)
The foreign exchange rate means the amount of one currency, which should be paid to purchase another currency, or, in other words, to be converted thereto. That is why the foreign exchange rate is often called the exchange rate.
The exchange rate regime is the system of certain exchange rate ratios between currencies. Depending on the manner of setting exchange rate, two alternatives are possible: an exchange rate may be strictly fixed to a foreign currency or float freely depending on the ratio of demand therefor and supply thereof.
Thus, for example, there are two types of floating exchange rate: free and managed floating. Under the freely floating regime the state does not interfere in the process of the exchange rate setting. The managed floating regime means that the exchange rate is set under the impact of demand and supply, which may be influenced by the state by means of foreign exchange interventions.
The main benefits of fixed exchange rates are their predictability and certainty. But, having regard to the fact that the state undertakes the obligation to maintain the fixed exchange rate, in case of excess of demand for foreign exchange over supply thereof, the central bank begins to sell foreign exchange from its reserves with a view to keeping the exchange rate at the targeted level. At the same time, the state’s foreign exchange reserves are exhaustible and it is impossible to hold the exchange rate of the national currency from decline by means of sale of foreign exchange from reserves for a long time.
The benefit of the floating exchange rate system is the possibility to carry out the more flexible monetary and fiscal policies, as well as to adjust external macroeconomic imbalances.
A foreign exchange intervention is an interference of a state, usually, via a central bank, into the transactions in the foreign exchange market by means of foreign exchange purchase or sale.
As a rule, the key target of carrying out foreign exchange interventions is exertion of an influence on the foreign exchange rate. However, they may be used for the purpose of attaining other objectives, for example, managing of gold and foreign exchange reserves.
4) In what manner are the trades in foreign currencies performed for the purpose of setting exchange rate?
Since June 2015 the trades in the main foreign currencies (the US dollar, the euro and the Russian ruble) are carried out at the JSC “Belarusian Currency and Stock Exchange” in the continuous double auction regime.
In the course of the continuous double auction the participants of trades are entitled to submit bids to the trading system during the whole time of the trading session. In the process of trades the bids for purchase or sale of foreign exchange are satisfied as long as the bids are made based on the declared exchange rates.
When a participant makes a bid for purchase, the trading system checks the availability of applications for sale with the exchange rate being less than the exchange rate of a bid for purchase or equal thereto, and, in the case of their availability, satisfies the bid for purchase at the exchange rates of suitable applications for sale starting from the lower one.
When a participant submits an application for sale, the trading system checks the availability of bids for purchase with the exchange rate being higher than the exchange rate of an application for sale or equal thereto, and, in case of their availability, satisfies the application for sale at the rates of the suitable bids for purchase, starting from the highest rate.
Depending on their characteristics, the unsatisfied bids/applications are sent to the queue of bids/applications, or rejected by the system. An entry of a new bid results in the performance of one or several transactions in case of availability of a counter offer in the trading system.
As a result, during one trading session a lot of deals at different rates are entered into under one currency. The average weighted rate of transactions at the close of twinning becomes the official one.