Bank has given itself a get-out-of jail card
While this won’t appease its many critics, the Reserve Bank is not the only central bank that has signalled it is ready to take the foot off the accelerator.
While governor Lesetja Kganyago delivered another repo rate cut of 50 basis points as widely expected by the market last week, that two out of five monetary policy committee members voted for a smaller reduction is a clear signal that the extraordinary easing phase is nearing an end.
Federal Reserve policymakers, who have been even more aggressive in their stimulus efforts for the US economy, have also signalled that there will not be easing at their June meeting as they assess the effectiveness of their actions so far, and the pace of the recovery.
Having cut the repo rate by 2.75 percentage points in just five months, taking real rates to negative territory, it was clear from the monetary policy committee statement that the Bank also thinks that the time to step back is fast approaching. In addition to the cuts, it has also taken steps to free up bank lending and has bought bonds in the secondary market to boost liquidity.
A telling comment was that it’s not too bothered by the possibility of inflation dipping below the lower end of the 3%-6% target range, with the head of the research department, Christopher Loewald, saying the Bank expects that to happen later in 2020.
Kganyago was quick to emphasise that this would not in itself be a trigger for more easing, just as the Bank would not overreact to the breach on the other end.
That pre-Covid-19 communication, with the emphasis on the midpoint of the target, had given the impression that the Bank would act long before a breach of 6% became a realistic option is best left for another debate. In the light of the unprecedented shock from Covid-19 and the potential job losses that will come with a 7% contraction of GDP, there will always be questions about whether it has done enough, and hence, like its peers, the Bank has given itself the getout-of-jail card called being “data dependent”.
Economists are convinced that data in the next few months will result in them delivering more cuts as the economic slump deepens and the threat of deflation becomes more real.
The liquor industry believes that about 118,000 jobs have been lost through the ban on alcohol sales in the past eight weeks. If you consider the often-stated statistic that every wage earned in SA supports four or five extra people, then the scale of the social and economic devastation behind that figure becomes clearer. And when one considers that this is just one industry over a two-month period, the numbers being bandied about job losses in the millions don’t seem so outrageous. It’s going to be a while before consumer demand drives inflation, though monetary policy cannot resolve price pressures caused by supply constraints.
In his prepared speech, Kganyago seemed to have foreseen the criticism that will come his way, especially in comparison to other central banks that have cut rates deeper and undertaken more aggressive interventions in the market. In the US, the Fed went as far as to say it would move into junk bonds via exchangetraded funds.
The magnitude of the response to the crisis, he said, was “dependent on the degree of policy space available to countries”. That has been one of the main arguments against the adoption of full-scale quantitative easing in SA.
Printing new money in the form of “hard” currencies that are backed by a surge in investor demand for safe assets isn’t the same as flooding the market with more rands that had already lost more than a fifth of their value.
After the Bank’s recent moves, it was hardly going to keep cutting rates at one percentage point at every meeting. With the effectiveness of rates movement reducing as you get closer to zero, the interesting part is the future of the Bank’s extraordinary measures, namely the purchase of government bonds.
Policymakers were coy at their meeting, and would not give details on how much, if any, they had bought in May. While their intervention was so small to be almost insignificant for those who advocate “QE proper” for SA, April still saw an escalation to just over R11bn. That was up from just over R1bn in March, though that was only a week’s worth of data.
The Bank has throughout insisted that its actions were aimed at improving liquidity and not to push down yields, which reached records at over 13% late in March.
Ten-year yields are below 10% now, at levels similar to those before the country was downgraded by Moody’s Investors Service in March.
What is not clear is whether we should read this as a sign of normality having returned or a consequence of the Bank’s purchases. May’s data, due out early next month, should provide a clue, and will be the first to reflect purchases after SA was kicked out of the World Government Bond Index at the end of April.
A big number won’t necessarily be something to celebrate as it will indicate the relative stability is just an illusion with the central bank having to compensate for outflows due to the downgrade. If there is a significant drop in the Bank’s purchases, then it will be a positive sign that demand for the country’s assets has shrugged off actions by the ratings agencies.
That could strengthen the argument that it may have room to be more adventurous.
IT WAS CLEAR FROM THE MPC STATEMENT THAT THE BANK ALSO THINKS THAT THE TIME TO STEP BACK IS FAST APPROACHING
ECONOMISTS ARE CONVINCED THAT THE DATA IN THE NEXT FEW MONTHS WILL RESULT IN MORE CUTS