Excess reserves, interbank markets and domestic money market intervention

This paper considers whether relationships exist between the daily weighted average 7-day interbank rate, the change in the daily 7-day interbank rate, the daily level of commercial banks excess reserves and the change in the daily level of excess reserves, which may guide domestic money market intervention. Monetary survey data for the period 1st June 2011 – 13th September 2013 (i.e. inflation targeting lite period) is used. Results show no correlation between excess reserves and interbank rate movements, even though a Granger causality test shows that in the absence of money market intervention, the level of excess reserves may determine both the level of and changes in the interbank rate. There is also highly significant causality from Central Bank intervention to the target interbank rate, but no correlation between the two. Furthermore, there is no evidence of correlation or causation between excess reserves and interbank rates when the interbank rate falls outside of the target. In conclusion, the relatively shallow nature of the Ugandan financial system prevents a distinct relationship between the interbank money market interest rate and commercial banks excess reserves, as a result a rules-based intervention policy is not suitable to Uganda.