Bank Al Maghrib explains treasury bond repurchasing measure amid persisting inflation

Since the beginning of 2023, Morocco’s central bank Bank Al-Maghrib (BAM) has purchased the equivalent of MAD 16.3 billion of Treasury bonds on the secondary market, a historic move that on first glance, contradicts BAM’s recent contractionary measures. 

This structural injection of liquidity into the banking system through treasury bill buybacks was launched at full speed in early January, as two separate operations added money directly into Moroccan banks’ balance sheets.

The objective of such operations known as “open market operations” is to directly affect the reserve balances of banks, to cause reactionary changes to prevailing interest rates. By buying securities, BAM can increase the money supply in the country and revive the economy. 

In a normal economic context, or even during a recession, central bank treasury bill buybacks are considered a normal and at times essential measure to revive a slowdown or a massive contraction in economic activities, caused by a significant fall in spending. 

However, since September 2022, BAM has taken a number of anti-inflation policies to drain liquidity from the market, in an attempt to curb ongoing and unprecedented rise in prices and costs. 

BAM raised the national key interest twice by 50 basis points each time in the last 4 months to limit loans and spending. By injecting money into the banking system as the buybacks will inevitably do, the opposite effect is likely to occur. 

Many questioned the decision in light o the bank’s ongoing monetary policy, as the two measures seemed to be contradictory, expected to have opposite affects.

BAM explains the decision

At a press briefing held on Thursday, January 19, in Rabat, the internal head of monetary and foreign exchange operations at Bank Al-Maghrib (BAM), Younes Issami, clarified the latest BAM structural operation.

With a third call for tenders scheduled for Monday, January 23, BAM’s open market operations aim to tackle a “declining demand from investors during its tenders, without compromising “the independence of the central bank and the conduct of its monetary policy.”

The average maturity of these vouchers is 6 months, with an average rate of return of 3.16%, this measure should restore investor demand after a drop caused by “the achievement of the limit that banks can hold in Treasury bonds,” said Issami which is fixed by the risk departments of the various commercial banks in the country.

This ceiling was reached because the interest rate on the secondary market has risen sharply since BAM’s key interest rate increase, which has a negative impact on investors’ portfolio.

Indeed, when interest rates rise on the secondary market, new bonds are issued with coupons higher than the old ones. The value of the latter is therefore decreasing since investors sell them to buy those that earn more.

The second reason for the decline in investor demand on the secondary market is “the fear of expectations of the evolution of interest rates, mainly the key interest rate. Investors prefer to wait to have more visibility than to invest, “said Issami.

The BAM official stressed that the central bank’s operations can under no circumstances be assimilated to “quantitative easing or money printing.”

Issami assured that the intervention  will not influence inflation or rates on the secondary market, since “treasury bonds were bought at market prices for average maturity.”