Repo rate is a blunt instrument when precision is needed
• The time has come for the Reserve Bank to expand its policy toolkit to promote inclusive growth
The Reserve Bank remains stubbornly fixated on a single monetary policy tool: the repo rate. But this overdependence on adjusting the benchmark interest rate to manage inflation and guide the economy is proving inadequate for addressing the country’s complex challenges.
It’s time for the Bank to expand its policy toolkit to promote inclusive growth.
Critics argue that changes to the repo rate influence shortterm interest rates and bond yields predominantly rather than actual lending rates for businesses and consumers. This limited transmission to the real economy constrains the tool’s effectiveness, especially for the credit-constrained sectors that are crucial for job creation.
Small and medium-sized enterprises (SMEs) — the backbone of employment creation — end up starved of affordable credit as the benefits accrue mainly to large corporates and sophisticated financial institutions.
Reliance on the repo rate amplifies SA’s vulnerability to global capital flows, triggering rand volatility, which adds uncertainty and discourages investment. This harms export competitiveness and long-term growth prospects. Moreover, the singular focus on inflation risks fuelling dangerous asset bubbles while neglecting the need for financial stability interventions.
In economic crises or downturns, the repo rate also offers limited room for stimulus when already near zero. This shrinks the central bank’s scope to respond effectively to shocks. As demonstrated by the fallout from the Ukraine war, hiking rates often cannot address imported inflation arising from external geopolitical factors.
Proponents of the status quo argue that the repo rate’s simplicity fosters market confidence and policy predictability. Its role in achieving the inflation target over two decades remains invaluable. Interest rate parity with global central banks also supports the rand’s stability. However, the Bank must now move beyond the repo rate’s constraints. Expanding the monetary policy toolkit is vital for tackling multifaceted challenges such as unemployment, inequality and low growth.
The Bank needs closer coordination with fiscal authorities to maximise synergies between policies. Joint initiatives could harness the trillion-rand assets of the Government Employees Pension Fund and the Unemployment Insurance Fund’s surplus to finance infrastructure, creating jobs while crowding in private investment. Fiscal expansion through targeted spending on social services and small business aids can complement monetary stimulus.
The Reserve Bank can provide targeted financing facilities and preferential rediscounting rates to bolster export competitiveness in sectors with high labour intensity and growth potential. This aids export diversification beyond commodities. Exchange rate management through direct intervention and capital flow measures can also strategically support exporters.
While risky, quantitative easing should not be dismissed outright. The Bank could incentivise banks to channel credit to productive sectors using dedicated lending facilities for SMEs, agriculture and manufacturing. Co-funded loan guarantees can share risks. Tax incentives for investments in job-rich, import-substituting industries could further complement monetary efforts.
As the financial sector regulator, the Bank can guide capital towards priority sectors by offering licensing preferences for manufacturing financiers. Varying cash reserve requirements and strategic bond issuance allows structured credit allocation. Marketfriendly incentives that mobilise domestic capital are preferable to blunt asset purchase restrictions.
The overriding imperative is to pragmatically expand the monetary policy toolkit instead of rigidly clinging to a blunt, limited instrument. Judicious co-ordination between the Bank and fiscal authorities using both conventional and unorthodox tools tailored to SA’s economic structure can unlock inclusive growth and maximum employment.
Passive monetary policy has never been sufficient for development. Less disposable income slows spending and investment, hampering growth. From the 2008 global financial crisis to Argentina’s currency instability, orthodox tools have repeatedly proved inadequate to resolve crises. This underscores the need for proactive, multifaceted policies.
When crisis strikes, textbook monetary and fiscal policies often fall short. From Japan’s post-1990 deflationary spiral to the 2008 US financial meltdown, conventional interest rate cuts and fiscal stimulus could not prevent economic calamity. More creative solutions were needed. Japan turned to “Abenomics”, combining fiscal stimulus, quantitative easing and structural reforms, revealing possibilities beyond orthodoxy. The US Federal Reserve unleashed a bold, multifaceted response, using interventions such as quantitative easing, targeted lending facilities and bank recapitalisations to contain panic.
Smaller economies also embraced unorthodox crisis management. Chile established a copper stabilisation fund to smooth volatile export earnings. Iceland tapped public participation in drafting a new constitution after its banking collapse, while restricting capital flight.
Such targeted, contextspecific interventions highlight alternatives when traditional tools falter. South Korea actively nurtured large domestic conglomerates called chaebols through preferential loans, technology transfer and export promotion support. This controversial industrial policy catalysed rapid development in key sectors.
The overriding lesson is clear: facing modern complex challenges requires expanding the policy arsenal. While risks exist, creative nontraditional solutions can mitigate crises, restore stability and rebuild public trust when textbook remedies alone prove inadequate. Economic orthodoxy must be balanced with pragmatic innovation.
Monetary policy alone cannot resolve all economic challenges. Advocating new tools doesn’t mean unconditionally easing rates. But equipping the Bank with a diverse toolkit, judiciously implemented in co-ordination with fiscal authorities, can address specific constraints through a tailored approach. It is the time to break free from reliance on a blunt instrument unsuited to the intricacies of inclusive, employment-centred development. The path forward lies in co-ordinated, pragmatic policy evolution, not rigid traditionalism.
THE RESERVE BANK CAN PROVIDE TARGETED FINANCING FACILITIES …
● Mafinyani is risk advisory & financial modelling partner at DiSeFu, a specialised financial technology and risk advisory firm operating in the SubSaharan region.