- Money market liquidity remains easy
- SARB open market operations
- Deposit growth and credit extension
- Money market interest rates
Money market liquidity
Liquidity conditions in the money market remain easy. In August, the accommodation provided by the Reserve Bank to banks declined to an average of R35bn compared to R37bn in July, which is below the long term average of R56bn. The daily liquidity requirement in August recorded a low of R33.6bn and a high of R54.4bn. The Reserve Bank has not drained all of the liquidity in the money market thanks to (1) bond purchase programme of R29.5bn from March to July 2020), (2) a decline in the sterilisation deposits as the government drew down R25.6bn in July, and (3) the IMF and NDB loan of $4.2bn and $1.0bn respectively which raised government cash balances by R86.0bn in July.
- The utilisation of sterilisation deposits and deposits from the international funding institutions (IFIs) are reflected in changes in government’s balances held at the SARB and commercial banks which affects money market liquidity. Further spending of IMF funds could require more open market operations by the SARB if the accommodation to banks is maintained at R35.0bn.
- The SARB did not purchase SAGBs in the secondary bond market in August after operations were scaled down in June and July to R5.1bn and R2.5bn. The functioning of the domestic bond market has normalized after the global selloff in financial markets in March and April. The SARB backstopped the market, purchasing R11.4bn and R10.2bn in April and May (which includes marked-to-market valuations).
Open market transactions in August 2020
Liquidity in the money market was drained through the utilisation of FX swaps as the government drew down on the IMF loan ($2.2bn). These measures allowed SARB debentures to decline by R2.7bn to R5.2bn.
Monetary base: Growth in the monetary base increased to 16.0%YoY in July 2020 (see Figure 8) compared to 3.1%YoY in February. The acceleration in M0 was driven by a substantial increase in notes and coins in circulation, (helped by the social grant payments) and an increase in excess reserves of banks held at the SARB. Note that M0 does not form part of the calculation of M3.
Money market interest rates
The 3m JIBAR rate declined to 3.417% from 3.44% on Wednesday, which lowers the level to 8bps below the repo rate of 3.50%. In our view, the decline this week reflects a small bias towards a 25bps repo rate cut at next week’s MPC meeting. The initial decline of 6bps below the repo rate in August to 3.44% should be interpreted in the context of ample liquidity, strong demand for bank deposits and subdued growth in credit extension. The average spread of the 3m JIBAR/repo rate since the phased in implementation of the increase of the Liquidity Coverage Ratio (LCR) from 60% on 1 January 2015 to 100% on 1 January 2019, has been 33bps. FRA rates are assigning a probability of approximately 40% to a 25bps rate cut at next week’s MPC meeting in contrast to a neutral outlook at the start of the week. The bias towards a rate cut was sparked by dovish comments from MPC member, Dr Chris Loewald, at a Tax Policy conference where it was indicated that there is space for monetary policy to be further eased.