Is the BCRD Betting on Interest Rates?
#91. February 2025
I can imagine that some of my general readers may become frustrated at times that this newsletter spends so much time on the arcana of central banking and the BCRD. Headed by someone who has been at the Bank for 50 years, I feel both that the institution needs more public oversight and that this is my particular value-added. I am certainly not the only one who understands what is happening; I am, however, one of a very few who do OUTSIDE the financial system, where the central bank is in a fine position to quietly impose consequences on any institution that threatens the Bank's reputation.
For some time now, I have been criticizing the BCRD's pretense that it is bringing down interest rates, especially through the ballyhoo around reducing the "Monetary Policy Rate". Does it believe that? By refusing to accept any offers to buy BCRD paper[1] at recent auctions, it looks as though the BCRD may be hoping that offers improve over time, betting that interest rates will decline. But the story is a bit complicated.
As we know, the Bank has a large amount of outstanding debt, mainly the result of taking over the bad loans from the banking crisis of 2003. The Bank issues paper for a certain number of years, then rolls them over into new paper when they come due. Since last June, it has not rolled over any of these bonds. Since March, it has only issued bonds of less than 6 months (so these have already fallen due), and since June, nothing at all. As recently as last week, it announced an auction of 3-year bonds, but, as in the July 2024 auction, rejected all the bids, which seem to have come in around 11%.[2] You can see the results here (a lot of white space!):
With the limited placement of longer-term paper, earlier paper falling due resulted in the BCRD's total outstanding amount of paper to decline from $1,036 billion at the end of January 2024 to only $853 billion at end-January 2025.[3] How did it manage this? There have been three factors involved:
1. Especially with the emergency expansionary measures of June 2023, the BCRD lent large sums directly to the banks for onlending to customers. Some of this has been repaid, bringing the BCRD's portfolio of loans to banks from $183 billion in January 22024 to $114 billion in January 2025.
2. The normal growth of the banking system along with the economy increases the demand for money, both cash and bank deposits, so demand from banks will switch from BCRD paper to currency and required reserve deposits. In addition, there has been some need for banks to reconstitute required reserves "liberated" in the June 2023 and other earlier rounds of monetary easing. So. the BCRD can allow some growth of liquidity caused by repayment of maturing paper to meet this demand from banks. In this case, this monetary base (currency plus required reserve deposits at the BCRD) grew from $408 billion to $469 billion in the last 12 months.
3. For the rest, the BCRD has issued more short-term paper, mainly overnight "repos" (repurchase agreements, which are basically short-term loans collateralized with government paper). While the January-to-January comparison saw a rise of only $5 billion, the failure to issue more paper over the last year has meant that the outstanding amount of these repos went from RD$12 billion on July 1 (lower than usual, but not historically low) to $117 billion yesterday (Feb. 17), one of the highest amounts ever.
It is not possible to know, though it is surely included in the monetary program whose so-called summary I discussed last week, what BCRD loans will be repaid, or what required reserves will need to be reconstituted, in February-March. We do know, however, that there is $27 billion in outstanding BCRD paper falling due in about 4 weeks, which may put more pressure on the BCRD to issue more longer-term paper to roll these over. It does seem likely that the BCRD would want to reduce its short-term liabilities, however.
Will the Bank issue more paper to absorb this extra liquidity?
Will it issue still more repos?
The banks all know that this is an issue facing the BCRD. If there is an auction, will they bid less aggressively, knowing that the bank needs eventually to place more paper?
BCRD longer-term paper has historically been sold at interest rates of 9%-12%, though in 2011-12 it went as high as 17%-19%, and at the beginning of 2023, at the peak of the monetary tightening, the BCRD paid around 16% on its paper. It will be interesting to see whether the Bank accepts bids above 11% at whatever its next opportunity turns out to be.
[1] These securities come with a wide variety of names: bonds, notes, certificates, bills, etc. I will refer to all of them as simply "paper".
[2] At the March 2024 auction, the BCRD accepted bids for only 5% of the amount offered. On earlier occasions, the Bank has accepted much more than what was notionally on offer.
[3] This is likely a main factor in the decline in BCRD losses in 2024 compared with 2023.