The SA Reserve Bank said on Friday that it will reduce overnight repo auctions to one per day from the two it has held since early March to inject liquidity into the banking system amid the coronavirus pandemic.

“This minor amendment to the liquidity management strategy will not have any adverse effect on liquidity operations and should not be construed as a change to the Bank’s liquidity provision to the market,” the Bank said in a statement.

Repurchase agreements, or repos, are a form of short-term borrowing used in money markets, with mainly commercial banks and investment houses buying the securities to raise cash quickly and meet capital ratio rules.

Early in the Covid-19 pandemic, banks and investment firms saw a rapid increase in redemptions and margin calls as nervous investors looked to pull their money out, while increasing bid-offer spreads made buying and selling difficult.

That forced the Bank to abandon its largely conservative approach and deploy unconventional policy measures, including a quantitative easing (QE) style bond-buying programme and a slew of large rate cuts, to limit the damage of the sharp liquidity drought.

Market conditions have since normalised, though volatility remains high, especially after the country saw credit rating downgrades in April, tipping SA into full junk status.

The Bank’s data on Friday showed it had bought R11.42bn worth of government bonds during March and April, bringing its total holding to R20.64bn.

The bank has not set a target for government bond purchases but some analysts think it could reach as much as R100bn to help plug a government funding gap.

“The Reserve Bank accommodation in the secondary market is picking up. A trend like this could meaningfully raise overall liquidity in the secondary market in the months ahead,” said economists at ETM Analytics.

A developing question in this context is whether there’ll be sufficient financing for the near R300bn in lower taxes expected by the Treasury.

“The bank’s lowering of liquidity requirements and additional repo auctions have narrowed spreads in short-term money market rates, or the thee-month Johannesburg interbank average rate (jibar). Long-term bond yields have also stabilised, with the yield on the 2030 issue dropping close to 400 basis points from Mid-march highs of 9.335%.

“The measures we took in March are working,” said Samantha Springfield, senior manager in the Bank’s market operations and analysis division. “The need for liquidity that we’d identified has been satisfied. We’ve seen those strains in funding markets dissipate and in some places disappear. But we will continue to provide as much liquidity as is necessary.” 


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