CBCS leaves pledging rate unchanged

June 16, 2023  –WILLEMSTAD, PHILIPSBURG – The Centrale Bank van Curaçao en Sint Maarten (CBCS) decided to pause its monetary policy tightening by leaving the pledging rate(1) unchanged. This step is consistent with the recent decision of the Federal Open Market Committee of the Federal Reserve to leave the Federal funds rate unchanged. Even though gross official reserves and the import coverage have increased in the first six months of this year, they are still expected to decline in 2023 – although less pronounced than in 2022. Against this backdrop, the Monetary Policy Committee (MPC)(2) of the CBCS will continue to monitor the economic and monetary developments in the monetary union closely and adjust the monetary policy stance if necessary.  

According to the latest projections, the deficit on the current account of the balance of payments of the monetary union is projected to narrow from 14.8% of GDP in 2022 to 12.7% of GDP in 2023. In March, a much larger deficit of 19.7% of GDP was projected for 2023. “The downward adjustment is caused by a sharper projected increase in the net export of goods and services combined with a higher than initially projected nominal GDP level of the monetary union for 2023”, explained CBCS executive director, Dr José Jardim. “The net export of goods and services will increase driven by a gain in exports combined with lower imports. The export growth is sustained primarily by higher foreign exchange receipts from tourism activities across the monetary union”, he pointed out. “Meanwhile, imports are projected to drop on the back of a decline in merchandise imports. The latter reflects primarily a decline in foreign exchange expenditure on oil derivatives due to an expected drop in average international oil prices. By contrast, merchandise imports by the wholesale and retail trade sector will increase reflecting increased tourism spending and a rise in domestic demand across the monetary union”, he added.  

Up till the end of May 2023, gross official reserves increased by NAf. 242.2 million compared to the end of 2022. The rise in reserves reflects, among other things, the inflow of funds from the Sint Maarten Recovery, Reconstruction and Resilience Trust Fund at the World Bank. However, construction projects are projected to gather pace in the second half of the year, resulting in more imports of merchandise and, hence, an outflow of reserves. Consequently, gross official reserves are projected to decline in 2023 as the projected external financing and capital transfers will be insufficient to cover the deficit on the current account of the balance of payments.  

Meanwhile, the import coverage rose, according to the latest estimates, from 4.7 months at the end of 2022 to 5.1 months at the end of May 2023, but is expected to gradually drop in the second half of the year reaching 4.5 months by the end of the year. This is still well above the norm of three months. Meanwhile, the liquidity of the commercial banks has increased somewhat up to May, after almost halving in 2022. The Fed’s aggressive interest-rate-raising approach has worked to some degree as U.S. inflation has eased somewhat in 2022.  

Even though inflation has declined further into 2023, it remains elevated. Expectations are that global inflation will further decline in 2023 due to, among other things, the monetary tightening by central banks, lower food and energy prices combined with moderate gas prices and robust labor markets. Given the lower inflation expectations, the Fed has so far increased the target policy rate at a slower pace in 2023. As things currently stand, the Fed’s future decisions depend on the development in U.S. inflation, employment, and banking stress. “A change of the Federal funds rate affects immediately the international money market rates and, consequently, the interest rates in the money market of the monetary union of Curaçao and Sint Maarten as the NAf. is pegged to the US dollar”, Dr Jardim explained.  

“Consistent with the decision of June 14, 2023, to leave the Federal funds rate unchanged, the CBCS decided to maintain the pledging rate at 5.50%. In addition, the CBCS will continue to aim at extending the average maturity of the outstanding balance of certificates of deposit (CDs) through offering longer maturities (i.e., 12, 26 and 52 weeks) on the bi-weekly auctions of CDs”, Dr Jardim stated. Since the changes in the CD policy introduced in September 2022, the share of longer maturities increased, contributing to the extension of the average maturity of outstanding CDs. “Therefore, bank liquidity will be held longer domestically contributing to the maintenance of a solid foreign exchange position”, he concluded. 

1 The pledging rate is the rate at which commercial banks can borrow at the CBCS in case of a liquidity shortage.
2 The Monetary Policy Committee discusses the economic and monetary developments and the monetary policy stance at least on a quarterly basis. The Monetary Policy Committee takes decisions on the monetary policy stance and the deployment of monetary policy instruments that are ratified by the Board of Executive Directors of the CBCS. 

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