CBCS reduces both reserve requirement percentage and pledging rate

 

Influenced by domestic and global financial market developments

Willemstad / Philipsburg – The Centrale Bank van Curaçao en Sint Maarten (CBCS) has decided  to reduce its reserve requirement by 0.50 percentage point to 18.50% while the pledging rate  was lowered further from 5.25% to 4.75%. “The decision to adjust monetary policy is anchored  by the normalization of economic and monetary conditions across the union. This easing of  monetary policy is supported by a solid and stable foreign exchange position and adequate  import coverage in the monetary union. In addition, the economies of the monetary union  surpassed their pre-pandemic levels driven primarily by significant improvements in the  foreign exchange generating capacity of the tourism sector”, stated executive director, Dr.  Jose Jardim. The decision to lower the pledging rate is also aligned with an anticipated further  reduction of the federal funds rate in December 2024. As uncertainties persist, the Monetary  Policy Committee (MPC) of the CBCS will continue to monitor the domestic and international  economic developments closely, particularly the key indicators for monetary policy in the  union and make policy adjustments as needed.  

According to the latest estimate, the current account deficit of the balance of payments as a  percentage of GDP dropped from 15.8% in 2023 to 15.4% in 2024. The underlying factors behind  the lower deficit, such as an increase in net current transfers from abroad, remain in line with the  September forecast. However, the deficit is higher than in the previous forecast due to a stronger 

than-anticipated rise in imports. The higher import bill in 2024 was primarily driven by increased  domestic demand, particularly due to robust investment growth across the monetary union. In  addition, oil imports rose due to a combination of higher average international crude oil prices  and more volumes purchased. Exports also grew, albeit at a slower pace than imports, driven  primarily by higher foreign exchange receipts from the tourism and transportation sectors.  

Despite the current account deficit, gross official reserves are expected to increase in 2024 driven  by strong inflows from external financing and capital transfers. Up to November 18, 2024, gross  official reserves grew by NAf.60.8 million. The rise in reserves was mainly attributable to the  transfers from abroad by pension funds, the World Bank in connection with the reconstruction of  Sint Maarten, and the Dutch Ministry of Finance. However, the net purchase of foreign exchange  and withdrawal of dollar deposits by the commercial banks (including those in Bonaire),  combined 

with transfers abroad by other financial institutions moderated the increase in gross official  reserves.  

The import coverage rose from 4.5 months at the end of 2023 to 4.6 months in November 2024  and is expected to remain at that same level in December 2024, which is still well above the norm  of three months. Meanwhile, the liquidity of the commercial banks, measured by their current  account balances with the CBCS, increased by 5.1% up till mid-November, driven by the transfers  by pension funds, other financial institutions, and the governments of Curaçao and Sint Maarten  from their accounts at the Bank to their accounts with the commercial banks. 

After raising the reserve requirement by 1.00 percentage point in February 2020, the CBCS has  maintained the percentage unchanged at 19.00% due to the excess liquidity in the banking system.  “However, with the monetary union’s foreign exchange-generating capacity, particularly in the  tourism sector, having improved and given the solid foreign exchange position and adequate  import coverage, the CBCS has decided to reduce the reserve requirement by 0.50 percentage  point to 18.50%, effective 16 December 2024”, Dr. Jardim explained. The reserve requirement is a  monetary policy tool that obliges commercial banks to hold a certain percentage of their deposit  base in a blocked account with the CBCS which does not pay interest. Hence, the reserve  requirement reduces the commercial banks’ liquidity as these funds are not available for  transaction purposes.  

The CBCS also decided to adjust the pledging rate for the second time this year, lowering it from  5.25% to 4.75%. Following two reductions in September and November 2024, market expectations  indicate that the U.S. Federal Reserve (Fed) will cut its policy rate further in December. “Given the  likelihood of another cut in the Fed funds rate, interest rates in the international money market are  expected to gradually decline over time. Consequently, this will influence the interest rates in the  money market of the monetary union of Curaçao and Sint Maarten, considering the peg of the  NAf. to the U.S. dollar and justifying the reduction of the pledging rate”, Dr. Jardim stated.  

Furthermore, CBCS will continue to offer attractive rates on its weekly auctions of CDs with the  aim of holding more bank liquidity domestically to support the preservation of a solid foreign  exchange position”, Dr. Jardim concluded.