South African markets cheer as Central Bank injects liquidity

South Africa’s central bank announced measures to inject liquidity into local markets, a day after cutting its benchmark policy rate by 100 basis points as the coronavirus outbreak risked plunging the economy into a prolonged recession.

The benchmark stock index rose by the most on record, yields on benchmark government bonds fell and the rand extended gains. The measures are aimed at supporting interbank lending and freeing up cash in the money markets in response to “liquidity strains,” the Pretoria-based South African Reserve Bank said in a statement.

“When markets are tight the SARB needs to ensure that banks have easier access to funding and that there is sufficient liquidity in the market,” said Alvin Chawasema, a trader at Sasfin Securities in Johannesburg. “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.”

South African stocks surge as central bank moves to inject liquidity

With immediate effect, the central bank will

Conduct intra-day overnight supplementary repurchase operations at 10 a.m. and 1 p.m. daily, except on Wednesdays, to provide liquidity support to clearing banks. The amount on offer will be decided on the day in line with the prevailing money market liquidity conditions. Adjust the standing facilities borrowing rate - the rate at which the central bank absorbs liquidity - to the benchmark repurchase rate less 200 basis points, from the current repo rate less 100 basis points. Adjust the standing facilities lending rate – the rate at which the SARB provides liquidity to the commercial banks – lower to the repo rate, from the prevailing rate of the repo rate plus 100 basis points. Yields on 10-year government bonds dropped 48 basis points to 11.38% by 10:05 a.m. in Johannesburg. The yield has climbed close to 12% earlier.

“The bond market has been driven by a shortage of cash,” said Michelle Wohlberg, a trader at FirstRand Bank Ltd. in Johannesburg. “So, now that the SARB has announced repo transactions, the strain on the cash liquidity will be alleviated, and we might see investors step up to buy bonds. This was what the market was hoping for in yesterday’s meeting.”

The rand gained 1.6% to 17.1871 per dollar, while the benchmark FTSE JSE Johannesburg All Share Index jumped as much as 8.4%, the most since Bloomberg stared keeping records in 1995, with the banking index advancing as much as 7.5%.