Financial markets/Financial markets :Money Market and Interest Rates

Overview
- Money markets are markets for short-term lending, borrowing and investing, i.e., for a year or less, to manage short-term liquidity. Money market transactions include unsecured interbank loans (clean loan), purchases/sales of short-term debt instruments (such as treasury bills, BOT bonds, promissory notes, bills of exchange, etc.) and repurchase agreements (repos). Repos may be transactions between the BOT and partner financial institutions, or with primary dealers that are thus called bilateral repos, or they may be transactions between private sector entities, i.e., private repos.
- As mentioned in the foregoing section, money market rates influence longer-term interest rates, but the rate trend is also determined by economic conditions, etc. The BOT uses the 1-day RP to set their monetary policy, thus transmitting their policy stance to financial markets and the real sector.
- In 2004, the BOT introduced the BIBOR (Bangkok Interbank Offered Rates) as reference rates on one-day to 12-month floating rate notes. Other than banks, money market participants include other financial institutions, large businesses and state enterprises.
- Interest rates are influenced by economic mechanisms, inflation, monetary policy, liquidity and market expectation. Generally, interest rates rise when the economy expands, or in times of high inflation, amid increasing demand for loans, or there is reduced liquidity. Interest rates tend to fall when the economy slows, or in times of low inflation, when there is limited demand for loans and there is excess liquidity.