The South African Reserve Bank has stepped in to keep money flowing in the economy by providing lenders with cheaper access to funding and reorganising the way it injects liquidity into the financial system.
Yields on benchmark government bonds plunged from record highs, the rand extended gains and the benchmark stocks index rose after the announcement.
"The South African Reserve Bank (SARB) has observed liquidity strains in various funding markets," the central bank said in a statement. "These strains have necessitated a review of the liquidity management strategy."
The standing facilities borrowing rate, the rate at which the central bank absorbs liquidity, will be adjusted to the benchmark repo rate less 200 basis points, from the current repurchase rate less 100 basis points, it said. It will also increase its repurchase auctions to improve money-market liquidity.
"When markets are tight the SARB needs to ensure that banks have easier access to funding and that there is sufficient liquidlty in the market," said Alvin Chawasema, a trader at Sasfin Securities. "They are lending cheaper to banks now and making it more punitive for banks to park money at the SARB, effectively encouraging inter-bank lending and activity."
The steps come a day after the central bank’s monetary policy committee voted to lower the repurchase rate by a full percentage point to 5.25%, the biggest in more than a decade, to support an economy that's expected to contract this year.
"The SARB deems this change necessary in order to encourage the flow of money market liquidity," it said. "Interbank lending and lending across funding markets is strongly encouraged, as it facilitates the flow of money market liquidity within the banking system."
Nolan Wapenaar, co-CIO at Anchor Capital, told Fin24 it was "significantly positive" that the Reserve Bank had taken action to facilitate a normalisation of the markets, adding that the latest action would make a bigger difference than the interest rate cut.
"As the Covid-19 crisis in South Africa has developed, we have seen a liquidity problem develop in the South African market, where assets are being sold to raise emergency cash," he said. "The demand for cash is so strong that assets are being sold at levels that are not justified by fundamentals. This has created a massive market dislocation over the last week.
"We are delighted that the Reserve Bank is responding to the domestic dislocation by temporarily increasing the amount of cash in the system," he said.
The move would make it more expensive for banks to deposit cash at the Reserve Bank, he argued, rather forcing them into the bond market. For a period the amount of liquidity that the Reserve Bank is taking out of the market would also be reduced, again freeing up cash for the bond market.