Weekly BoBCs kick in amidst concerns
Mbongeni Mguni | Friday May 3, 2019 18:00
Before April 30, the central bank conducted auctions of BoBCs on a 14- and 91-day basis, incurring expenses of P88 million in 2017.
The bank’s BoBC expenses averaged P1.7 billion between 2006 and 2010, raising outrage in economic circles as commentators slammed the BoB for utilising what are essentially taxpayer funds to support commercial banks.
The central bank reacted by placing a P10 billion limit on the value of outstanding BoBCs in November 2011, saying banks had become too reliant on the certificates and would be encouraged to be more innovative in seeking avenues to invest their excess capital.
However, with BoBCs now offered weekly and the central bank announcing plans to lift the P10 billion cap, commentators are expressing concern that the ‘bad, old days’ of high interest expenses could be returning to the BoB.
“It depends on the level of BoBCs offered, but certainly the BoB will want to keep an eye on the risks associated with having more frequent auctions, particularly in the area of expenses,” a treasury analyst with a local bank told BusinessWeek.
Last week, central bank governor, Moses Pelaelo said the new seven-day BoBC would become the primary instrument of conducting monetary operations, replacing the 14-day BoBC.
“It is important to emphasise that the move to the seven-day BoBC represents a purely technical change to the conduct of monetary operations with no shift to the monetary policy stance,” he said.
Pelaelo previously told BusinessWeek that the introduction of a seven-day limit and the lifting of the cap, were part of measures to give the BoB flexibility in its open market operations. “We should not tie our hands unduly,” he said. “With the ceiling, when there’s a major crisis and you need to respond by injecting or removing liquidity, if you cannot do that, there will be market misalignment.“Again, if you allow too much liquidity to build up because you fear the costs of monetary policy, you are causing misalignment of interest rates.
“Your policy signal will not serve anything because the banks will do what they want to do.
“What we are not doing is opening the floodgates; our hands are on the levers and we have other tools to use.”
For his part, the BoB’s director of research and financial stability, Tshokologo Kganetsano told BusinessWeek that the central bank was in control of the latest policy moves.
“We looked at the costs of conducting monetary policy and the costs of not doing so, and we are saying the costs of doing nothing would be huge,” he said.
“For instance, if you keep a P7 billion cap on BoBCs and there is P15 billion excess liquidity, you are only doing partial absorption, which would push interest rates down and would not be consistent with our monetary policy position.”
The BoBC is the central bank’s main instrument for monetary policy, with the auctions used to mop up excess liquidity amongst banks and thus ensure the entire market’s interest rates are in line with the BoB’s guidance.
Excess liquidity in the banking sector is associated with inflationary pressures due to the resultant inclination amongst banks to relax lending conditions.
It also tends to lower interest rates for depositors and generally discourage savings. Excess liquidity also limits the BoB’s ability to transmit monetary policy in the market, while also increasing the costs it incurs in attempting to absorb this excess.