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Monetary Policy >

_ Mpol NL DNB

MONETARY POLICY: THE NETHERLANDS

Note: Special Loan tenders/subscriptions are not daily, but generally used as a target rate proxy. Also SpecLns rates are dated on the day of settlement (variable) rather than day of
tender/auction/transaction (T).

De Nederlandsche Bank: Legislation, decision-making, transparency

De Nederlandsche Bank (DNB) was established in 1814 and given a de facto monopoly on the issue of bank notes. (De facto because it alone was
freed from stamp duty.) The bank was intended to provide a more efficient payments system and an expansion of commercial credit to boost
economic activity. The Bank Act 1948 transferred ownership of DNB to the Dutch State and described it tasks. It stated "that it shall be the duty of the
Bank to regulate the value of the Netherlands currency in such a way as will be most conducive to national welfare, and in so doing, seek to stabilize
this value as much as possible". The same article provided that "the Bank shall provide for the monetary circulation in the Netherlands, as far as this
circulation consists of bank notes," and "that the Bank shall exercise supervision over the credit system according to the provisions in the Act on the
Supervision of the Credit System". The Bank Act 1998 described how DNB would fit in the European System of Central Banks and its relationship with
the ECB.

The policy-making body of the Dutch central bank was the Governing Board. The DNB Governing Board met regularly to discuss interest rate policy,
with meetings arranged depending on market circumstances. Interest rate decisions would be announced immediately. Rates on special loans (open
market operations) were adjusted very frequently and often in small steps, with rate decisions being announced for every new special loan tender
(variable rate)/subscription (fixed rate). The somewhat irrelevant official rate on secured advances (as well as the discount rate) was adjusted much
less frequently.

DNB monetary policy instruments and operating targets

Operating procedure
Since the mid-1970s the framework of money market operations was largely determined by the existence of persistent money market shortages.
From September 1973 DNB provided the banking system with a quota-regulated access (contingentsregeling) to its discount window and (secured)
advances on the banks' current accounts with DNB. The quotas were established for periods of 3 months and they determined a maximum average
use over the 3 month period. Initially, market interest rates were influenced by imposing variable surcharges on so-called zones of excessive use of
the discount window and advances.

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Since 1979 money market interest rates were influenced by the rates on increasingly frequent open market operations, in particular the regular
tenders (variable rate) and subscriptions (fixed rate) for special loans (speciale beleningen: quasi-repo contracts), and occasionally dollar swaps.
Details of the special loan operations would normally be announced (approx 16:00) the day before the tender/subscription, which would then be held
early-morning next day. Special loan contracts had varying maturities over time (1 month or less), and also depended on money market and
exchange rate circumstances. During the late-1980s mostly short maturities of 1-7 days were used (average 3 day) and continuously rolled over, i.e.
expiring contracts being replaced by new contracts. From the early-1980s only fixed rate subscriptions were used, with volume determined by DNB
(% of volume bids).

Figure: Representation of Dutch market for bank reserves. May 1997 introduction of a penalty rate Lombard facility (marginal advances).

Operating targets

DNB monetary policy strategy

DNB monetary policy has largely been determined by the requirement to maintain a fixed exchange rate. The dollar exchange rate was the
intermediate target until the final collapse of the Bretton Woods system in March 1973. Subsequently, the Netherlands participated in the European
currency 'snake' arrangement (March 1973-1979) and entered the Exchange Rate Mechanism of the European Monetary System in March 1979,
effectively fixing the exchange rate against the D-mark. From January 1999 the Netherlands participates in the euro.

Since 1983 almost all interest rate decisions followed corresponding changes in German interest rates (frequently after consultation between the two
central banks).

Several times, Dutch monetary authorities have attempted to address monetary problems (for example, excessive money growth) in ways that tried to
avoid the constraints imposed on money market interest rates by the fixed exchange rate regime. In fact, they formally defined two distinguished
areas of monetary policy, suggesting they could be treated separately. Narrow monetary policy (interest rate and exchange rate) and broad monetary
policy (money and credit growth). Broad monetary policy amounted to various systems of quantitative restrictions on money and credit growth (see
Hilbers (1998) for a description and review).

* postwar until end-1950 qualitative credit controls.

A system whereby DNB permission was to be obtained for all credits in excess of fl. 50,000.

* 1950s and 1960s.

quantitative credit restrictions:
1. 1951 until end-Mar1952 [excess lending penalised by the requirement to borrow from DNB, irrespective of the bank's actual liquidity position]
2. 02Sep1957 - 19Mar1958 [excess lending to the domestic private sector penalised by a surcharge of 1 percent on central bank discount window
borrowing]
3. 01Jan1961 - 01Jan1963 [excess short-term lending to domestic private sector penalised by requirement to hold interest-free deposits with DNB]
4. 01Oct1963 - 10Jun1967 [as 3.; in 1965 extended to long-term lending]
5. 01Jan1969 - 01Mar1972 [as 4.; , in 1969-1970 extended from commercial banks to savings banks and giro institutions]
cash reserve requirement:
Mar1954 - Aug1963 [from Sep1963 the cash reserve requirement was set to zero]
 
* early 1970s indirect monetary control using liquidity reserve requirement.
19Jul1973 - 1979 [requirement to hold liquid assets with DNB depending on short- and long-term liabilities on the banks' balance sheet] 
 
* late 1970s and 1980s return to quantitative credit controls.
1977-1981 net credit restriction
May1977 - Jul1981 [gross lending minus long-term liabilities, excess lending penalised by requirement to hold interest-free deposits with DNB]
1986-1987 so-called gentlemen's agreement
[voluntary restriction on growth of net lending by banks ('beperkte dijkbewaking')].
1989-1990 monetary cash reserve
01 Jul1989 - Apr1990 [excess growth of net lending (referred to as net money creation, NMC) penalised with maintenance of interest-free deposit
with DNB; effectively the penalty was converted into payment of a corresponding fine. From April 1990 the reserve ratio remained at zero until the

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arrangement expired.]
 
The systems of direct controls on money and credit growth largely failed to have the desired results and were frequently circumvented by market
participants, as has been the common experience in other countries as well. 
 
* 1990s abandonment of money and credit controls
In its 1991 Annual Report DNB accepted that the preconditions for controlling domestic money and credit supply did not exist. The fixed exchange
rate became its sole objective.
 
 

HISTORICAL DATA, TABLES, SUPPLEMENTARY INFORMATION

Historical interest rate data

Below is a selective survey of key current and historical market interest rates and official interest rates.
PR = policy rate, indicator of policy stance and changes; SF = standing facilities (SF1 lending, SF2 depositing) available to banks and to be used on their initiative; OMO = open market operations or
interbank interventions used bythe central bank on its own initiative.

Country Instrument Interest rate Description

Netherlands PR Rate on Rate on advances:

(special) Rate on special advances (quasi-repo): Regular open market operations by DNB. Maturities varied over time, starting with approx. 1 month
advances during the 1970s and declining to only a few days during the 1990s. Collateralized loan contracts (special loans) were used, due to uncertainty
about the legal status of true repo contracts.

SF1 Rate on Interest rate set by DNB on short-term collateralized lending to banks (rate on advances) and rate on funds supplied to banks by discounting
advances and eligible securities (discount rate). The discounting of eligible bills and provision of advances in current accounts were both equal part of DNB
Discount rate lending to banks. The difference in rates is mostly due to the conceptual difference between a discount rate and the interest rate. In the
absense of a sufficient supply of eligible bills, advances represent the more important component. Subsidy rate and quota scheme. Discount
rate discontinued 1 January 1994.
Marginal rate on advances: In May 1997 DNB changed the system of advances by making normal advances only on fixed term (rather than
on daily rollover) and by introducing a separate penalty rate Lombard facility (referred to as marginal advances, with one-day maturity).

Target 3-month euro-guilder rate

Call money rate: Interest rate charged on (unsecured) call loans in the interbank market.

OMO >1 x w Historically foreign exchange market interventions and swap operations. Later regular tenders for special advances (i.e. repos).

Market 3-month Treasury bill rate

3-month loans to local authorities
1-month, 3-month IB/AIBOR: Interest rate interbank market. AIBOR benchmark rate introduced 1986.

Sources:

 
Table DNB Presidents 
Chairman Tenure 

L.J.A. (Leonardus) Trip 1945 - 1946

M.W. (Marius) Holtrop 1946 - 1967
J. (Jelle) Zijlstra 1967 - 1981
W.F. (Wim) Duisenberg 1982 - 30 June 1997
A.H.E.M. (Nout) Wellink 1 July 1997 - 30 June 2001
K.H.W. (Klaas) Knot 1 July 2011 -

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Table Intermediate targets Netherlands

Exchange rate official/informal targets
Effective date     parity rate / central rate       comment

U.S. dollar  (1USD= ...)

Bretton Woods / IMF  (IMF member since 27Dec1945, Article VIII 15Feb1961)
18Dec1946          2.65285
21Sep1949          3.80000              30.5% devaluation fl
07Mar1961          3.62000              5% revaluation fl

Smithsonian Agreement
21Dec1971          3.24470           new central rate
14Feb1973          2.92024         10% devaluation US dollar

19Mar1973                              EEC countries float against the USD

Dmark  (100DM= ...)

European 'snake' currency arrangement
19Mar1973       103.708            
29Jun1973        109.412             5.5% revaluation DM
17Sep1973        104.202            5% revaluation fl.
18Oct1976        106.286            2% revaluation DM
16Oct1978        108.370            2% revaluation DM
European Monetary System
24Sep1979        110.537            2% revaluation DM
21Mar1983       112.673             5.5% revaluation DM only partially followed by fl. (2% revaluation DM remained)

Note: 15Aug1971 Nixon announces closure of U.S. "gold window". 18Dec1971 signing of Smithsonian Agreement: USD to devalue from $35 to $38 per ounce gold (7.9% devaluation) and in addition
some countries revalue against the USD (overall appr. 10% devaluation of USD). Most markets kept closed Mo 20Dec1971, effective date Tue 21Dec1971. 12Feb1973 US Treasury announces USD
devaluation to $42.22 per ounce gold (10% devaluation).
Note: Under Bretton Woods system currencies were allowed to move within a band of 1% above/below the parity rate, but in practice important countries maintained a band of 3/4%.

Note: From 10May1971 DNB withdrew its official dollar buy and sell rates. From 19Mar1973 DNB withdrew its official dollar buy and sell rates.
Note: From 12Feb1973 currency markets were closed for several days (dollar crisis). From 02 through 16Mar1973 currency markets were again closed.
Note: The Basle Accord of 10Apr1972 created the European currency snake, starting 24Apr1972. From 19Mar1973 the European currencies float against the USD.
Note: The EMS started 13Mar1979 and its official reference rate was the Ecu, but in practice the Dmark was the major currency. Currencies allowed to move within a band of 2.25% above/below the
Ecu rate, or 1.125% for all bilateral currency rates. [Some currencies had a 6% margin].

 
1989 capital market intervention
In March 1989 DNB first used its portfolio of long government bonds, specifically accumulated for capital market intervention since October 1987. The
aim was to provide an alternative investment for banks, reducing the growth of domestic net money creation and avoiding a possible outflow of capital
with risks of exchange rate pressure. However, DNB quickly decided on a new system of credit control [monetary cash reserve] and the bond portfolio
remained useless. DNB sold the portfolio during 1992-93.
 
Dutch money/liquidity definition
From 1951 Dutch monetary analysis has preferred a broad liquidity concept. Broad money included 'all liquid liabilities of money creating institutions and
the government" "to the extent that these are convertible into money, at a large scale, at short notice, without substantial costs and without significant
loss of market value". This broad definition included short liabilities of the central government and the local authorities (i.e. Treasury paper, short term
deposits and current acccount deposits). Maturity criterion was 2 years original maturity. Furthermore, a part of savings accounts ('liquid savings') was
attributed to broad money; until 1964 savings deposits with commercial banks; from 1964 'liquid savings' based on observed 'velocity' (i.e. turnover,
amount of savings withdrawal); as of January 1991 savings deposits were eliminated from the M2 money concept and moved to a new M3 money
concept.
In the redefinition of late-1992 short-term government and local authority liabilities lost their status as monetary liquidity. [In fact, moved to M4, a
concept not used by DNB.] Money M3H was redefined to include short-term savings deposits, with maturity up to 2 year.
Of course, over time many other definition changes and reclassifications occurred. Major changes occurred in the treatment of various financial
institutions [commercial banks, giro institutions, savings banks, and specific public sector banks].

De Nederlandsche Bank DNB Homepage

Central Bank

Monetary policy tactics

Den Dunnen, Instruments of money market and foreign exchange market policy in the Netherlands, DNB Monetary Monographs nr.3 1985.

Monetary policy strategy

De Greef, Hilbers and Hoogduin, Moderate monetarism: A brief survey of Dutch monetary policy in the post-war period, DNB Staff Report nr.28,
1998

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Hilbers, Financial Sector Reform and Monetary Policy in the Netherlands, IMF Working Paper 98/19, 1998. 

Unfortunately, most of the literature on Dutch monetary policy and DNB policy instruments is available only in Dutch. Also, given the strong and
persistent focus on a fixed exchange rate (particularly from1983 onwards) general discussions on monetary policy are scarce and mostly dated
before the mid-1980s.

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