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Policy interest rate expectations and the behavior of the interbank money market

Author

Listed:
  • Piero Garcia

    (Banco Central de Reserva del Perú.)

  • Jorge Pozo

    (Banco Central de Reserva del Perú.)

  • Rafael Velarde

    (Banco Central de Reserva del Perú.)

Abstract

This article analyzes the influence of monetary policy rate expectations on the daily reserve accumulation behavior of financial institutions in the Peruvian interbank money market. Using daily data from 39 institutions between January 2017 and September 2024, we show that expectations of policy rate hikes are associated with a faster pace of reserve build-up, while expectations of rate cuts are followed by a slower accumulation pattern. These findings suggest that reserve accumulation dynamics reflect not only liquidity needs driven by legal reserve requirements but also strategic responses to anticipated changes in the policy interest rate. Our empirical analysis, based on fixed-effects panel regressions, provides evidence on the existence of a significant effect of rate expectations on reserve build-up, providing valuable insights for commercial bank’s liquidity management strategies and the design of central bank open market operations.

Suggested Citation

  • Piero Garcia & Jorge Pozo & Rafael Velarde, 2025. "Policy interest rate expectations and the behavior of the interbank money market," Working Papers 2025-019, Banco Central de Reserva del Perú.
    • Handle: RePEc:rbp:wpaper:2025-019
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