Carol Paton Editor at Large
South African Reserve Bank. Picture: MARTIN RHODES
South African Reserve Bank. Picture: MARTIN RHODES

The SA Reserve Bank on Wednesday announced additional measures to add liquidity to the financial system, including a further expansion of refinancing operations and a programme to buy government securities in the secondary market.

As the Covid-19 global pandemic impacts on SA, investors and companies have been dumping investments like government bonds in favour of cash, creating a liquidity squeeze in parts of the system. The cost of government borrowing has also rocketed in the last two weeks with yields spiking, with moves accelerating as sellers struggled to find buyers.

An initial set of measures for the money market were announced last Friday, also aimed at increasing liquidity, or the amount of cash circulating in the banking system.

In addition to the Bank’s main seven day refinancing operations, it will also now offer a refinancing operation with a term of three months. The three month refinancing operation will be conducted on the same basis as the weekly main refinancing operations at an interest rate of the repo rate plus 30 basis points.

“This measure will add significant liquidity to the money market. The SARB will continue to assess market liquidity conditions and make adjustments as appropriate, including further maturities of up to 12 months,” said the statement.

Secondly, the Bank will begin a programme of purchasing government securities in the secondary market. The amount and maturity of the bond purchases was not disclosed and “will be at the discretion of the SARB,” said the statement. Purchases will be conducted across the yield curve.

"In addition to providing liquidity and promoting the smooth functioning of domestic financial markets, this will allow the SARB to enhance its Monetary Policy Portfolio (MPP). The MPP is one of the instruments in the SARB’s toolkit for managing money market liquidity, and can be used to add or drain liquidity from the market."

Last Friday, the bank increased the number of daily supplementary repo auctions by the Reserve Bank’s domestic market operations desk will increase from one to two, saying that if necessary, the size of the weekly main refinancing operations would be increased.

It also adjusted the level of interest rates that applies to its standing facility through which banks square off their position at the end of day by making it more punitive for banks to return cash at the end of day.

The rate at which the bank absorbs excess liquidity will be adjusted to the repo rate less 200 basis points (bps). The rate at which the bank provides overnight liquidty will increase to the repo rate. Previously this was done at the repo rate plus 100bps.

The Bank said today it could amend the rates on the standing facility borrowing rate should it be evident that liquidity is not being transmitted to other funding markets.

Changes to its liquidity management strategy "should not be construed as providing any signals regarding the future monetary policy stance," said the Bank, which cut its repo rate by 100 basis points last week.