THE Reserve Bank gobbled up a massive $65 billion from the market through financial sector stabilisation bonds on Monday but failed to sink the market into deficit, triggering fears in the banking sector that i
t could respond with drastic measures to induce shortages.
The central bank has used tight monetary policy as its chief instrument in reining-in rampant inflation, currently topping 1 000% year-on-year.
“We fear the worst,” a money market dealer told businessdigest yesterday. “The feeling in the banking sector is one of fear — we fear the (central) bank could come up with something drastic to create a deficit market.”
The market went short to the tune of $10 billion on Monday after financial institutions scurried to comply with a Reserve Bank directive forcing them to hold a prescribed amount of the bonds on their books.
“This is against all expectations in the market,” a bank treasurer said. “We expected heavy shortages.”
The market expectation had been that the market would plunge to shortages as high as $30 billion on take up of the bonds.
The shortages softened on Tuesday to $2,7 billion before the market rebounded to a surplus position of $1,6 billion on Wednesday.
The market was forecast up $8 billion on Monday on the back of heavy treasury bill maturities.
Market players said there had been massive inflows into the market whose sources were not been clear.
But speculation swirled that the central bank was heavily buying foreign currency, injecting huge amounts of money into the market in the process.
Some financial institutions had also been allowed to access funds locked up in the non-interest yielding non-negotiable certificates of deposit, and this had helped bolster liquidity on the market.
Reserve Bank governor Gideon Gono said last week the bonds, whose holding thresholds for financial institutions would be pegged against the institution’s balance sheet size as at September 30, 2006, would “ensure that the financial sector further strengthens its medium to long-term position”.
A commercial banking institution is required to hold bonds equivalent to 10% of the balance sheet size, while a merchant bank’s holding threshold for the bonds is pegged at 7,5%.
Finance houses, building societies and discount houses’ holding thresholds are 5% of the balance sheet size per institution, with asset management firms compelled to hold bonds amounting to 2,5% of their balance sheet sizes.