Monetary policy is really conducted whenever a central bank releases information that affects markets' expectations about the future path of short-term interest rates and about the expected effects of that path on the economy. Monetary policy could therefore be defined as the process of managing expectations about the future path of the monetary policy instrument and the probable effects of that path on the economy. In this context, transparency is a crucial element of a successful monetary policy strategy. 3 If a central bank wants to implement its monetary policy strategy efficiently, it should communicate its intentions and expectations to financial markets and to the public as clearly as possible. In other words, based on its assessment of the available data, it should lay out the likely direction of the monetary policy path  3  See for example Blinder et al. (2001) for an in-depth overview of the benefits of transparency in central banking. BIS Review 30/2006  3  as well as the expected economic effects of that path. Central bank transparency then allows markets to better anticipate the future path of short-term rates, the effect of this path on other financial market prices and ultimately the impact on the real economy. The monetary policy transmission process is thus rendered more efficient. Transparency has a second advantage: It reduces uncertainty and may therefore lead to lower volatility in various financial markets.
However, there may be projects with a lifetime of days or certainly months and weeks, such that lowering the frequency of settlement points to, say, annually would clearly create an artificial and harmful annual economic cycle and affect price stability. Second, increasing the frequency of points in time when banks need to settle, say to hourly, would increase liquidity management costs of banks considerably. Because this is not needed from a monetary policy perspective, this would mean a waste of economic resources. Finally, central banks probably want to control the ability of banks over time to settle their accounts, and also banks are probably more comfortable to see that other banks settle their accounts with the central bank on a regular basis, as proof of their soundness. To sum up, the daily cut-off separating free central bank credit and credit against a monetary policy-related interest rate is a reasonable convention, reflecting monetary policy transmission mechanism issues, convenience of banks’ liquidity management, and credit risk management considerations. It allows central banks to safeguard price stability, while at the same time ensuring the smooth functioning of the payment system. Turning to collateralisation, it is important to note that in the past, central banks often set ceilings for intraday and overnight credit to banks. In contrast, today, many central banks, including the Eurosystem, tend to provide unlimited access to both types of credit, but with the need to provide eligible collateral.