While there is a “surprising” amount of interest for quantitative easing to be implemented in South Africa, Reserve Bank Governor Lesetja Kganyago said such a programme “doesn’t make much sense”.
The governor was speaking during a webinar hosted by University of Pretoria’s faculty of economic and management sciences on Wednesday.
The Reserve Bank in recent months has responded to the impact of Covid-19 on the economy through a raft of measures such as lowering interest rates by as much as 300 basis points to provide relief to households and firms, backing a R200 billion credit guarantee scheme for small businesses, and loosening capital requirements for banks to lend more.
But despite this there have been growing calls for the bank to do more – both by government officials such as deputy finance minister David Masondo and some economists have even suggested quantitative easing (QE) is necessary due to the risk of deflation.
Kganyago however has said that while the country is experiencing disinflation – the slowing increase in prices, there is no risk of deflation – when prices turn negative.
“QE will become appropriate when interest rates are at the zero lower bound and there is deflation risk.
“While inflation has eased and created space for lower rates, I am not aware of any professional analyst who projects deflation in South Africa. Our own SARB forecasts are in line with this consensus,” said Kganyago.
Price stability first
He added that if deflation were to manifest, then the bank would deploy the tools at its disposal, “as appropriate”, while keeping to its mandate of price stability. “Our inflation-targeting framework would help us make that decision, and would underpin the credibility of any steps we might need to take,” he said.
If the bank were to opt for QE by buying bonds on the secondary market, it would have the effect of investors shifting risk back to the public sector’s balance sheet, at a higher price, he said.
“In other words, it would be a private sector bailout, arranged by the SARB. Worse, QE would reduce the incentives for new investors to come and buy long-term sovereign debt, because there would not be enough yield or compensation for the longer-term risks now visible.”
Kganyago said that the bank has instead focused on providing liquidity by buying government bonds on the secondary market, at different maturities, in the response to the sudden stop in global capital flows, that followed as a result of the pandemic.
“As the central bank, we have unique powers to provide liquidity, and we have used them to restore market functioning. These interventions have been helpful so far,” he said. Yields eased, even though the bank did not specifically target this.
“We are in very difficult circumstances, but QE isn’t the answer. We need to focus on real solutions,” he said.