In line with the Monetary Policy Committee’s (MPC) task to evaluate, determine, and provide transparency on the monetary policy actions of the Central Bank of Aruba (CBA), the CBA communicates the following. During its meeting on March 24, 2023, the MPC decided to retain the reserve requirement rate at 25.5 percent as of April 1, 2023. Accordingly, commercial banks must hold a minimum balance at the CBA equal to 25.5 percent of their clients’ liquid deposits. The decision to maintain the reserve requirement rate unchanged at 25.5 percent was based primarily on the decrease in the estimated excess liquidity in February 2023 compared to December 2022. The CBA will continue to monitor the excess liquidity developments in the coming months and stands ready to change the reserve requirement rate, if deemed necessary.
The MPC considered the following information and analysis during its deliberations:
International and official reserves
The international reserves, comprising the official reserves of the CBA and foreign reserves held by the commercial banks, declined by Afl. 90.1 million as of March 3, 2023, compared to end-December 2022 (Graph 1). Official reserves fell by Afl. 87.8 million, while the foreign reserves at the commercial banks contracted by Afl. 2.3 million. Consequently, as of March 3, 2023, official and international reserves amounted to Afl. 2,703.1 million and Afl. 3,151.1 million, respectively. Maintaining reserve adequacy is critical to keeping the fixed exchange rate between the Aruban florin and the US dollar. In this regard, despite aforementioned decline, international reserves remained comfortably above the minimum required three months of current account payments during February 2023. Current account payments consist, among others, of import payments, interest payments made to investors, and foreign transfers such as money remittances by foreign workers. Official reserves also stayed within an adequate range when benchmarked against the International Monetary Fund’s (IMF) Assessing Reserve Adequacy (ARA) metric (Table 1).
| Table 1: Reserve benchmarks monitored in 2023 | ||||
| Jan | Feb | |||
| Estimated current account coverage ratio1 | 7.1 | 7.5 | ||
| Estimated IMF ARA Metric2 | 106.4 | 106.9 |
| 1 The number of months of current account payments covered by the international reserves. 2 The ratio between the level of official reserves and the minimum adequate level (following IMF), in percent. |
Inflation
The End-of-Period (EOP) inflation rate stood at 6.6 percent in January 2023 (December 2022: 5.7 percent) (Graph 2). The consumer price index (CPI) jump in January 2023, compared to January 2022, was mainly the result of higher utility prices, which continued to affect the ‘housing’ component (3.1 percentage points contribution). Moreover, prices in the ‘food and non-alcoholic beverages’ component accelerated (1.4 percentage points contribution), while gasoline prices surged, mainly impacting the ‘transport’ component (1.3 percentage points contribution).
The 12-month average inflation rose to 5.8 percent in January 2023, up from 5.5 percent in December 2022. The inflationary pressures were due to the elevated oil price in international markets, as well as the hikes in water and electricity tariffs as of August 2022. Furthermore, Aruba imported much of the soaring prices from its trading partners, particularly the United States and Europe. Meanwhile, in January 2023, EOP core inflation (excluding energy and food) reached 2.5 percent (December 2022: 1.6 percent). On a twelve-month average basis, core inflation amounted to 2.3 percent (December 2022: 2.2 percent).
Commercial bank excess liquidity Aggregated excess liquidity fell from Afl. 819.7 million in December 2022 to Afl. 690.3 million in January 2023, continuing the declining trend observed during 2022 (Graph 3). Furthermore, preliminary estimates of excess liquidity in February 2023 showed a further contraction of Afl. 40.6 million compared to January 2023. Nevertheless, excess liquidity remained above (+Afl. 401.6 million) the estimated level the commercial banks may wish to hold as additional liquidity cushion.
