The Bank of Israel to begin using makam as an active monetary instrument

28.2.2007
 
The Bank of Israel to begin using makam as an active monetary instrument
 
  According to the makam issue program for March, NIS 6.1 billion of the new series of 12-month makam bills will be issued, reflecting a reduction of about NIS 3 billion in the total makam balance.
  After more than a decade of gradually expanding makam issue to establish it as a monetary instrument while soaking up excess liquidity of the banking system, the Bank of Israel will begin to use makam as an active tool of monetary management, ie, to absorb or inject liquidity depending on the circumstances.
The Bank of Israel announces its makam issue program for March, according to which it will issue the sum of NIS 6.1 billion in the new one-year makam series. This is some NIS 3 billion less than the series redeemed, which was a larger than usual series. In so doing, such additional money flows will reach the money base.
The Monetary Department of the Bank of Israel announces that since the mid-1990s the Bank has increased the quantity of makam bills in order to soak up excess liquidity in the banking system, replacing interest-bearing deposits that were for a long time the major instrument used for this purpose. The goal of substituting the deposits with makam bills is to develop a liquid money market in Israel through an absorption tool that is traded in the secondary market and is accessible to all of the investing public, and not only the commercial banks. The aim of the Bank in expanding the amount of makam bills was to absorb liquidity to the point where the commercial banks are in a basic liquidity deficit, rather than surplus, so that the Bank of Israel sets the short-term interest rate through the flow of cover to this deficit, achieved through monetary loans to the banks by tender. Such use of monetary tools is standard in developed countries. This situation was reached in November 2006, the first month that the Bank of Israel managed its current monetary activities exclusively through monetary loans.
After a long period of development, makam bills are now one of the most actively traded fixed income instruments on the Tel Aviv Stock Exchange. Based on the assessment that the makam market has reached sufficient maturity, the Bank of Israel has decided to use makam more actively to manage banking system liquidity.
The Monetary Department notes that the meaning of this decision is the use of makam bills to inject or absorb money according to current needs of the banking system, based on expected developments over a horizon of a few months, but not on a day-to-day basis. In the next few months, makam bills are expected to be used to inject money -- by issuing fewer new makams relative to the number reaching maturity. This is in line with the projected path of government cash flows, which involves a surplus absorption in the coming months so as to prepare for particularly large redemptions of bonds at the end of June and September, and is also based on the desire to ease the launch of the new Real Time Gross Settlement (RTGS) payment system.
In accordance with developments in money flows from the government budget and the overall situation in the money market, the Bank will determine its makam issue plan in the second half of the year. As far as is possible, the Bank will strive to issue makam series in uniform quantities and in order to do so, may add to the issue of existing series, with less than 12 months remaining maturity.
The Monetary Department also notes that the makam issue plan is geared to complement the Accountant General's plans for bond issues, including short-term bonds, against a background of mutual consultation on government debt management. The aim of these mutual discussions is to support the continued development of Israel's financial markets, in particular that of the money market.
In light of the considerable uncertainty regarding overall cash flows in the economy, the quantity of monthly makam issues will be adjusted to ongoing developments in banking system liquidity. Therefore, the program for makam issue for a given month will continue to be published shortly before the beginning of that month.