In line with international market expectations.

Willemstad/Philipsburg:--- The Centrale Bank van Curaçao en Sint Maarten (CBCS) decided to keep its current monetary policy unchanged by leaving the pledging rate at 5.75%.1 This decision is based on the market expectations that the Fed will leave its target policy rate unchanged amid the declining trend in U.S. inflation. Furthermore, although the gross official reserves are expected to decline slightly, the import coverage is expected to remain stable well above the norm in 2024. An adequate import coverage supports the main objective of the CBCS’ monetary policy, namely maintaining the stability of the peg of the Netherlands

Antillean guilder to the US dollar. In the near term, changes in the monetary policy indicators are expected to be limited, yet uncertainties remain.

According to the most recent estimates, the deficit on the current account of the balance of payments of the monetary union dropped from 19.1% of GDP in 2022 to 15.1% of GDP in 2023 and is projected to narrow further to 13.7% in 2024. "The projected narrowing in 2024 is ascribable to a higher nominal GDP level in the monetary union combined with a lower current account deficit.

 

Still, the expected decline in the current account deficit has been revised down induced by a lower increase in the net export of goods and services”, explained CBCS executive director, Dr. José Jardim. “The revision in the net export of goods and services reflects a lower than initially projected increase in exports, notably foreign exchange earnings from tourism, moderated by a higher import bill driven mainly by stronger private investments in Curaçao”, he added. In addition, the

2024 forecast for both the income balance and current transfers balance has been adjusted downwards.

After an increase of NAf.169.8 million in 2023 due mainly to transfers of funds by the World Bank for the reconstruction of Sint Maarten and by pension funds from abroad, gross official reserves are projected to decline slightly in 2024. Despite the projected decline in gross official reserves, the average import coverage is expected to remain unchanged at 4.7 months in 2024, well above the norm of 3 months. Up to February 23, 2024, gross official reserves dropped by NAf.57.4 million.

Still, the import coverage remained stable at 4.7 months.

 

Meanwhile, following an increase in 2023, the commercial banks’ liquidity has declined in the first two months of 2024, primarily because of the net purchase of foreign exchange and withdrawal of dollar balances by the commercial banks at the CBCS, the increase in required reserves, and the net purchase of certificates of deposit (CDs).

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

The U.S. Federal Reserve (Fed) has maintained its target policy rate unchanged since July 2023, as the inflation outlook has been easing but remained above its target of 2.0%. The Fed’s future adjustments will depend mainly on inflation development, the economic outlook, and balanced risk factors. A change of the Federal funds rate affects the international money market rates instantly and, subsequently, the interest rates in the money market of the monetary union of Curaçao and Sint Maarten as the NAf. is pegged to the US dollar. Market expectations are, however, that the Fed will not lower its rate until more confidence is gained that inflation is moving sustainably toward the target of 2 percent.

“Considering these developments, the CBCS has decided to leave the pledging rate unchanged at 5.75% maintaining the 25 basis points spread 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 maintenance of a solid foreign exchange position”, Dr. Jardim ended.