The Central Bank of suriname (Photo: Twitter @Suriname Herald)

Central Bank of Suriname increases cash reserves rate to slow inflation

The Central Bank of suriname (Photo: Twitter @Suriname Herald)

The Central Bank of Suriname (CBvS) on Wednesday of last week announced an increase in cash reserve rates as it aims to slow the rate of inflation.

“Effective December 30, 2020, the SRD cash reserve rate will be adjusted by four percentage points; thus, the current rate is raised from thirty-five percent to thirty-nine percent,” a release from the central bank stated.

CBvS said it reached the decision following consultation with the management board of banks in that country.

Reducing liquidity, slowing inflation

For the last few months, according to the bank, there has been excess liquidity in the Surinamese economy, which threatens to reduce foreign exchange and inflate the price of goods and services.

A Surinamese $10 bill (Photo: Caricom)

“In the context of monetary policy… The tightening of liquidity will reduce domestic demand, which will have a positive impact on domestic inflation and exchange rates,” CBvS explained.

The bank noted that it had not explored the measure before since the economy has been reeling from the impact of the coronavirus crisis and increasing the cash reserves rate earlier in 2020 would have “put further pressure on economic activity” and, possibly, to prevent the loss of jobs.

Interest rates

“Since 10 August 2020, the CBvS has created a facility for loans to companies affected by COVID-19, in consultation with the local banks. This facility will remain in effect for the time being. The CBvS will use a combination of monetary instruments to reduce excess liquidity to reasonable proportions, thus reducing disruptive influences on the economy,”

In addition to the increase of the cash reserve percentage, the bank will be offering short-term investments to the banks to further reduce excess liquidity in the economy. 

“The tightening of liquidity will reduce domestic demand, which will have a positive impact on domestic inflation and exchange rates”

The combination of instruments, the CBvS believes, will minimise a possible negative impact of the higher cash reserve requirement on the interest rates, since an increase in the cash reserve percentage usually precedes an increase in the interest rates on loans from banks. 

However, given that the banks will generate interest income from short-term investments, CBvS anticipates that the rise in cash reserves should not negatively impact interest rates. 

“Furthermore, the CBvS and general banks will do everything in their power to implement a possible marginal interest rate hike inevitably on consumer loans and not on investment or productive loans,” the monetary authority assured.