A turbulent start to 2023 on the Moroccan financial market. While tensions are palpable due to the sharp rise in rates on the Treasury bill market (BDT), recorded in early January, the Central Bank has decided to activate an unusual monetary policy instrument: the injection of liquidity through the repurchase of Treasury bonds. It was only used once by Bank Al-Maghrib (BAM) in the early 2000s.
Questions then arose about the reasons and objectives of these liquidity injections, especially since the Central Bank is simultaneously tightening monetary policy to curb inflation.
Two contradictory approaches? A policy of quantitative easing? The market is looking explanations for the action of BAM which has already injected 16.2 billion dirhams into the Treasury bond market and intends to continue its program.
To remove any misunderstanding about its action, the Central Bank organized a press briefing on Thursday, January 19.
According to Younes Issami, acting head of monetary and foreign exchange operations, the Central Bank has chosen to activate this instrument to “help bring demand back to the Treasury bond market“.
BAM to the rescue of the Treasury
“We noticed that there was a sharp drop in demand during the auctions organized by the Treasury. The origin of this drop in demand comes from several factors, mainly the banks reaching the limit for holding bonds in the Treasury and the fear of investors”, he explains.
In the case of banks, “the limits, which are set by the respective risk departments of commercial banks, were reached due to the rise in rates which negatively impacted the performance of the portfolios held. Therefore the margin to hold more than BDT has been reduced significantly.”
And more generally, “there is apprehension among investors in relation to expectations of changes in interest rates, mainly the key rate after two successive increases. Most investors have no visibility. There is therefore a normal behavior of some investors who prefer to wait rather than invest”, he continues.
Thus, the objective is to bring demand back to the market. And help banks reduce their losses in this segment? “The redemptions were very short-term and were made at the market rate. If there was a loss, it has already been recorded. Moreover, since these interventions, the curve has remained stable, so the banks have not made any gains”, we are told. “If banks want to reduce the impact on their results, they must sell long term.”
Why not talk about quantitative easing policy?
Central Bank officials are adamant. “This Treasury bill buyback program cannot be equated with a quantitative easing policy (Quantitative easing) or money creation.” They present several arguments to support this claim.
First, the action of Bank Al-Maghrib is limited to Treasury bills, and not to all bonds.
Then the program is capped at 25 billion dirhams, they reveal, so that the amount of global liquidity injection does not change. “The amount injected into the BDTs is 16 billion dirhams, BAM’s advances have fallen by 13 billion dirhams”, advances the Central Bank.
Clearly, the banking market which is in structural liquidity deficit needs the interventions of BAM. Being obliged to advance liquidity to the banks, the Central Bank finally just replaced one instrument (7-day advances) with another (redemption of BDT) to give, along the way, a boost on the Treasury bill market.
Moreover, BAM officials also reveal that the program to buy back BDTs from banks is conditioning ; the latter undertake to reinject the amounts into the BDT market.
Another argument: the buyback program concerns short maturities. “BDTs bought back at market price have an average maturity of 6 months.”
Gold to make Quantitative easing, we must act on long maturities, they explain. “Central banks intervene more on long maturities to give investors the assurance that rates will fall. These are generally massive purchase programs that influence the yield curve since we have seen a drop in rates .”
The request is back
“Thanks to this action, we saw demand return to the auctions: 35 billion dirhams during the first session and 24 billion dirhams during the second. These are figures that we had not seen for quite some time”, comment -they.
The Central Bank will multiply calls for tenders until the program of 25 billion dirhams is exhausted. It intends to inject another 8.8 billion dirhams depending on market demand.
An evaluation is carried out regularly. It is not excluded that another program may be considered if the conditions that motivated the implementation of this one are still present.