* Bank reduces daily auctions as liquidity improves
* Bond purchases in QE-style policy at 11.42 billion rand in April
* Gvt shortfall may force SARB to step up purchases – analysts (Adds data for cenbank bond purchases, analyst comments, background)
By Mfuneko Toyana
JOHANNESBURG, May 8 (Reuters) – South Africa’s central bank (SARB) said on Friday it would 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 SARB’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 in order to raise cash quickly and meet capital ratio rules.
Early in the pandemic, banks and investment firms saw a rapid increase in redemptions and margin calls as nervous investors looked to pull out their money, while increasing bid-offer spreads made buying and selling difficult.
That forced the Reserve Bank (SARB) to abandon its largely conservative approach and deploy unconventional policy measures, including a quantitative easing 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, although volatility remains high, especially after the country saw credit rating downgrades in April, tipping Africa’s most developed economy into full junk status.
The bank’s data on Friday showed it had bought 11.42 billion rand ($622.19 million) worth of government bonds during March and April, bringing its total holding to 20.64 billion rand.
The bank has not set a target for government bond purchases but some analysts think it could reach as much as 100 billion rand to help plug a government funding gap.
“SARB 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 300 billion rand 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 3-month JIBAR.
Long term bond yields have also stabilised, with the yield on the 2030 issue dropping close to 400 bps from Mid-march highs of 9.335%.
“The measures we took in March are working,” said Samantha Springfield, senior manager in the SARB’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,” Springfield said. ($1 = 18.3545 rand) (Reporting by Mfuneko Toyana; Editing by Nick Macfie, Kirsten Donovan)
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