Willemstad/Philipsburg – The Centrale Bank van Curaçao en Sint Maarten (CBCS) decided to ease its monetary policy stance by reducing the pledging rate1 by 0.50 percentage point to 5.25%. This decision is based on the solid and stable foreign exchange position and import coverage in the monetary union, and the expected reduction of the federal funds rate. However, the Monetary Policy Committee (MPC) of the CBCS will continue monitoring the domestic and international economic developments closely, particularly the key indicators for monetary policy in the union, and will adjust its policy if necessary.
“According to the latest projection, the deficit on the current account of the balance of payments of the monetary union is expected to drop from 15.8% of GDP in 2023 to 13.9% in 2024, due mainly to an increase in net current transfers from abroad”, stated executive director, Dr. Jose Jardim. Net exports will remain practically unchanged as the increase in the export of goods and services will be offset by a higher import bill. “In line with the increase in tourism activities in 2024, foreign exchange earnings from tourism and transportation services are projected to rise across the monetary union. Meanwhile, the projected increase in imports is driven mainly by higher merchandise imports. Especially, merchandise imports by the wholesale and retail trade sector is expected to go up reflecting increased tourism spending and higher domestic demand across the monetary union. The ongoing private investments in Curaçao and Sint Maarten will also result in higher merchandise imports by the construction and utilities sectors”, he explained.
In the first eight months of 2024, gross official reserves increased by NAf.168.2 million. The rise in reserves was attributable mainly to the transfers from abroad by the World Bank in connection with the reconstruction of Sint Maarten, pension funds and the Dutch Ministries of the Interior and Kingdom Relations and Finance, and the net sale of foreign exchange by the commercial banks to the CBCS. However, the withdrawal of dollar deposits by the commercial banks (including those in Bonaire), combined with transfers abroad by other financial institutions moderated the increase
in foreign reserves. Against this background, gross official reserves are expected to grow in 2024 as the projected external financing and capital transfers will exceed the deficit on the current account of the balance of payments.
The import coverage rose from 4.6 months at the end of 2023 to 4.8 months at the end of August 2024, driven by the rise in gross official reserves moderated by a minor increase in the projected target import of goods and services. Meanwhile, the projected average import coverage for the entire year is expected to reach 4.7 months, well above the norm of 3 months. Meanwhile, the
1 The pledging rate is the rate at which commercial banks can borrow at the CBCS in case of a liquidity shortage.
liquidity of the commercial banks, measured by their current account balances with the CBCS, decreased by 15.2% up till the end of August, driven primarily by the net withdrawal of dollar balances at the CBCS, the increase in required reserves, and the net purchase of CDs.
Following strong interest rate hikes in 2022, more moderate increases in 2023, and no changes since July 2023, the U.S. federal Reserve (Fed) seems to be approaching the moment of a first cut of its policy rate. Due to slower economic growth and cooling inflation, the Fed is expected to start gradually lowering its fed funds rate as of its next policy meeting on September 18, 2024. Even though inflation is still above the 2.0% target, the Fed is expected to balance its dual mandate of moderate inflation and maximizing employment, which has recently shown signs of slowing down. “Given the expectation of a first cut in the fed funds rate, interest rates in the international money market are likely to decline gradually over time and, consequently, 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”, Dr. Jardim indicated.
Against this background, the CBCS decided to change the pledging rate for the first time since September 2023, by reducing it from 5.75% to 5.25%. Furthermore, the CBCS will continue to offer attractive rates on its weekly auctions of CDs with the aim to hold more bank liquidity domestically to support the preservation of a solid foreign exchange position”, Dr. Jardim concluded.
