Policy Framework

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I. Introduction

Since its inception in 1993, Qatar Central Bank (QCB) has inherited the Qatar Monetary Agency’s monetary strategy of targeting the exchange rate. The formal framework for the exchange-rate policy is a fixed parity between the Qatari riyal (QR) and the United States dollar (USD) at QR 3.64 per dollar. Hence, the de facto priority objective of the QCB monetary policy is to keep the QR stable against the USD. Aspects other than the exchange rate are of no high priority in relation to monetary policy (e.g., cyclical developments in Qatar). Thus, the QCB monetary policy had to have been subordinated to the policy of exchange rate.  Consequently, QCB monetary policy is drawn and implemented to manage the short-term interbank interest rates with a view to sustaining the fixed parity between the QR and the USD. The current QCB interest rates framework focuses on the average overnight interbank rate (AOIR). The QCB overnight Lending Rate replaced the Repo Rate in 2002 as the main indicator of QCB monetary policy stance. The liquidity concept key to QCB monetary policy is the commercial banks’ current-deposits account at QCB, since these funds can be immediately used as means of payment at the banks’ initiatives. Therefore, the aggregate current-deposits account is referred to as “primary liquidity” or “QR liquidity.”

II. QCB Interest Rates Framework

QCB interest rates framework is a multi-rate framework that utilizes three monetary instruments as its means to inject and/or absorb QR liquidity: A double-featured instrument labeled ‘The Qatar Money Market Rates' (QMR); and the more conventional repurchase agreements. QMR comprises two standing facilities: A lending refinance standing facility and a deposits standing facility. Both facilities operate within a mechanism designed to help steer the AOIR. All commercial banks may request access to these facilities. Both QMR facilities are extendable to next day-rollover where transactions are electronically executed.

Under the QMR mechanism, commercial banks may use the lending facility to obtain overnight liquidity from QCB and/or use the deposits facility to deposit overnight liquidity at QCB at a pre-specified initial interest rates subject to bank-by-bank ceiling. Effective rates are flexible in the course of a monetary-policy-day. QCB sets the initial rates at the beginning of each day. The initial lending rate is the QCB Lending Rate (QCBLR), and the initial deposits rate is the QCB Deposits Rate (QCBDR). Henceforth, the path of each QMR effective rate is influenced by the evolving conditions of primary liquidity in the banking system.

The QMR lending rate is regularly the highest overnight rate in the money market since a bank’s acquirement of a QMR loan always represents an alternative to borrowing via the interbank market, provided that neither ceiling is binding. The QMR deposits rate is usually the lowest overnight rate in the interbank market since a bank placement of a QMR deposit always represents an alternative to lending in the money market, provided that neither ceiling is binding. The AOIR may rise above the QMR lending rate or fall below the QMR deposits rate in extraordinary cases of scarce or abundant liquidity, respectively.

The QMR rates form a flexible width corridor the width of which may change during the day, depending on the conditions prevailing in the money market. It is noteworthy that while a fixed QMR corridor (fixed interest rates over the course of the day) helps regulate interday primary liquidity, the flexible QMR (interest rates) corridor has the added advantage of helping manage intraday QR liquidity. This can be achieved via influencing intraday supply of and/or demand for primary liquidity in the interbank market. Furthermore, the QMR mechanism helps develop the interbank money market and enhance its performance via encouraging banks to trade more interbank primary liquidity.

III. QCB Interest Rate Management

The QCBLR is the key rate that QCB uses as the main indicator to convey signals to the market revealing the stance of its monetary policy. Changes in this rate manifest shifts in the orientation of QCB monetary policy. Reductions signal easing, and raises indicate tightening of QCB monetary policy stance. Therefore, it plays a key role in guiding the AOIR and helps regulate the overall level of market rates. QCBDR is a function of QCBLR.

The initial rate on QMR lending facility (QCBLR) sets the lower bound for the QMR lending rate during a monetary-policy day, and the QMR lending rate in turn sets the upper bound for the overnight money market rates. The initial rate on QMR deposits facility (QCBDR) sets the upper bound for QMR deposits rate during the day, and the QMR deposits rate in turn sets the lower bound for the overnight interbank rates. While the QMR overnight interest rates ‘corridor’ provides a dragging anchor on other interbank short-term rates, it leaves the market free to trade at any level constrained only by its expectations of the policy stance, QCB will adopt at its next QMR review. 

IV.  Repurchase Agreements (Repo)

Repurchase agreements’ operations comprise purchases of assets by the central bank under a contract providing for their resale at specified price on a given future date (limited to two weeks or one month as per Circular No. 49 of 2002), and are used to supply reserves. Repos are conducted in domestic government securities, that is, loans backed by domestic assets.

Strictly speaking, repurchase transactions are classified as indirect money market instrument as they are usually initiated by central banks, operate through market mechanisms, and serve to manage primary liquidity in the banking system. Yet, although QCB sets the rate and duration for repurchase agreements (a characteristic of money market instruments), the QCB Repo Rate (QCBRR) is known in advance and the size and timing of the repurchase transactions are rather initiated by commercial banks.  Repurchase agreements provide commercial banks with means for longer-maturity source of fund (i.e., than a single day) at higher interest rates.  As such, QCBRR is a marginal rate that helps guide the longer-term interbank money market rates.

V. Monetary Policy Committee

The primary responsibility of the QCB Monetary Policy Committee (MPC) is to formulate QCB’s monetary policy.  The MPC is chaired by the Governor and includes the Deputy Governor and the Director of the Department of Economic Policies (DEP) as members.

The Monetary Policy Division at the DEP constantly reviews the QR interest rates in view of developments in international interest rates, in particular, the US Federal Funds Rate and reports to the Director of the DEP.  Based on the report, the Director of the DEP may choose to call upon the MPC to meet and discuss possible changes in the QCB’s monetary policy stance with the aim of maintaining stability in the local USD exchange market at fixed parity.  The QR/USD interest rates differential and the Repo Rate are major policy tools at the disposal of the MPC.

Decisions taken by the MPC are announced to commercial banks operating in Qatar electronically and to non-bank public via local media.