CBCS keeps the pledging rate unchanged

The Centrale Bank van Curaçao en Sint Maarten (CBCS) decided to maintain its current monetary policy unchanged. Hence, the pledging rate will remain at 5.75%.
This decision is based on the Federal Reserve’s (Fed) decision to leave its target policy
rate unchanged until more confidence is gained that inflation is moving sustainably toward its
2% target. In addition, although the import coverage, which is the main operational target of
the monetary policy conducted by the CBCS, is expected to drop slightly to 4.6 months in
2024, it will remain well above the norm of 3 months. Despite persistent uncertainties, changes
in monetary policy indicators are likely to have limited near-term effects.
According to the most recent forecast, the current account deficit of the balance of payments as
a percentage of GDP will drop from 15.7% in 2023 to 13.8% in 2024. Although the current account
deficit is projected to decline, the 2024 forecast entails an upward revision of 0.1 percentage point
from March 2024. “The expected slightly higher current account deficit as percentage of GDP is
not caused by a higher current account deficit but by a lower-than-earlier projected nominal GDP
level of the monetary union. The current account deficit is expected to decrease reflecting a
sharper projected increase in the net export of goods and services, moderated by a weaker
improvement of the current transfers balance”, described executive director, Dr. Jose Jardim. “The
net export of goods and services will increase in 2024 driven primarily by a gain in exports,
moderated by higher imports. The export growth is sustained mainly by higher foreign exchange
receipts from tourism activities. Meanwhile, the projected increase in imports is due primarily to
higher merchandise imports. Especially, merchandise imports by the wholesale and retail trade
sector is expected to go up reflecting increased tourism spending and higher domestic demand
across the monetary union. The ongoing private investments across the monetary union will also
result in higher merchandise imports by the construction and utilities sectors”, he explained.
After increasing in 2023, gross official reserves declined by NAf.71.4 million up to May 2024. The
decrease seen so far is attributable mainly to the withdrawal of dollar deposits by the commercial
banks and institutional investors at the CBCS, mitigated by transfers from abroad by the World
Bank in connection with the reconstruction of Sint Maarten, pension funds and the Dutch Ministry
of Finance, and the net sale of foreign exchange by the commercial banks to the CBCS. Even
though gross official reserves are projected to decline slightly in 2024, the average import
coverage is projected at 4.6 months in 2024, down from 4.7 months in 2023, and well above the
norm of 3 months.

1 The pledging rate is the rate at which commercial banks can borrow at the CBCS in case of a liquidity shortage.

Meanwhile, the commercial banks’ liquidity is showing a decreasing trend. During the first 5
months of the year, liquidity decreased by NAf.128.4 million, driven primarily by the net withdrawal
of dollar balances at the CBCS, the increase in required reserves, and the net purchase of CDs.
The last adjustment of the U.S. Federal Reserve (Fed) funds rate took place in July 2023, and it has
been kept unchanged so far in 2024 due to a moderating but still elevated inflation. The US
inflation is expected to remain around 3.0% in 2024. Therefore, the Fed is expected to maintain its
policy rate unchanged until it has gained greater confidence that inflation is moving sustainably
toward the target of 2%. Nevertheless, future adjustments of the Fed funds rate range will depend
also on the economic outlook and balanced risk factors. “Given the expectation that there will be
no change in the Fed funds rate in the short term, interest rates in the international money market
are likely to remain relatively stable. Consequently, the CBCS anticipates minimal impact on the
interest rates in the money market of the monetary union of Curaçao and Sint Maarten,
considering that the NAf. is pegged to the U.S. dollar”, Dr. Jardim explained.
“Against this background, the CBCS decided to leave the pledging rate unchanged at 5.75%, which
is 25 basis points above the Fed funds rate. Furthermore, the CBCS will continue to offer longer
maturities (i.e., 12, 26 and 52 weeks) on its bi-weekly auctions of CDs with the aim to hold bank
liquidity longer domestically to support the preservation of a solid foreign exchange position”, Dr.
Jardim ended.