South Africa's central bank switches back to one daily repo auction
JOHANNESBURG - South Africa’s central bank, the South African Reserve Bank, 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 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 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.