Inflation and Money Market- does BCC rate have (really) an impact on the liquidity?

The year-on-year inflation has increased by 120 basis points (bps) during last week to stand at 19.38%. The annualized inflation rate on his side dropped from 25.44% to 24.94%.

Last week T-bills auction was largely undersubscribed, by approximately USD 20 million on a total envelope of almost USD 100. This is probably the result of the CDF shortage on the market observed few weeks ago. The weighted average yield for the auction was 26.59%, 45 bps drop from the previous week while the real interest rate on the T-bills dropped by 165 bps to reach 7.21%.

The Central Bank (BCC) offering is most of the time high enough to accommodate commercial banks’ demand resulting in high interests payments from the BCC to the commercial banks- the T-bills revenues represents, for the majority of the banks operating in the DRC, their main source of revenues.

In theory it makes sense to increase the size of the envelope (leading to higher yields) to attract more CDF but in the ‘unique’ case of the DRC, I argue that it does not make any difference on the market liquidity, worse it increases the cost of the monetary policy for no reason. My reasoning is that the T-bills in their current form are the ‘only’ financial instruments available to commercial banks in CDF. Therefore they have no other choice than to buy T-bills with their excess liquidity if they want to avoid idle funds! Therefore, the interest rates could be lower and the demand from the banks would be the same as they have absolutely no alternative (banks only lend to their customers in CDF in exceptional occasion, almost all loans are in USD)!!!

The proof: when the BCC introduced this new form of auction few years ago, the yield on t-bills dropped below 5% (negative interest rate) because banks were afraid to be rejected by the BCC!

On the customers’ side, I had the opportunity to discuss with several multinational companies CFO & treasurers when I was a treasurer myself and they are not interested in T-bills! Most of them only want their bank to be able to convert their excess CDF in USD for import (or other need denominated in USD) purposes or simply to prevent their CDF revenues to shrink with depreciation.

As a result, the interest rates offered to commercial banks to reduce the CDF liquidity on the market are totally irrelevant in the case of the DRC. As long as T-bills will be their only alternative, the banks will purchase them, no matter the rate!!!