Bold move as Bank turns to ‘quantitative easing’
• Government bonds being bought in secondary market
As the Covid-19 crisis takes hold of SA, the Reserve Bank fired its own bazooka on Wednesday stepping into the secondary bond market to purchase government bonds with newly created money.
The government bond market has been unable to function normally for the past week, with yields spiking to record highs due to a shortage of buyers. This has dire implications for the cost of borrowing by the Treasury, which must raise an average of R1.1bn a day to fund the country’s borrowing requirements.
Government’s across the world, especially the US and Europe have pumped huge stimulus packages into their economies to combat the effect of the sudden stop brought on by the pandemic.
The move was welcomed by the market and — although the Bank avoids the term — is widely perceived to be a form of quantitative easing, a policy in which the central bank prints new money and injects it into the economy.
Bonds surged and the rand gained for a second day running, also boosted by optimism in global markets that the US would pass a massive stimulus programme to counter the economic effect of the coronavirus outbreak.
The Bank did not provide any details on the quantum or length of the programme, saying only that it would last until “market conditions return to normal”.
Deputy governor Fundi Tshazibana said in an interview on Wednesday that the Bank would not be sterilising the purchases and would therefore be adding funds to the money supply.
“Essentially these purchases of bonds are unsterilised purchases and hence it is actually newly created money.
“The Sarb will not be using its foreign exchange reserves for the purchases of bonds, however, the Sarb will be injecting fresh liquidity into the market.”
However, it would also not intervene in the primary market, he said.
“We will only be buying bonds in the secondary market, so we are not funding the government directly nor attempting to influence the price at the auctions. This is an operational
intervention to ensure the market functions,” she said.
Investec Wealth & Investment investment strategist Brian Kantor welcomed the move.
“In normal circumstances, printing money to fund spending leads to inflation. But in these circumstances, there is no demand — demand is collapsing as people lose their incomes. It’s about trying to get income into people’s hands so that they can buy food and essential items, otherwise they will starve to death. The Bank has finally come to terms with the situation,” he said.
The move will lower the cost of borrowing, as the yields in the secondary market inform the bids at auctions, and increase the government’s ability to issue debt at a time when it is making social-economic commitments to counter the effects of the coronavirus pandemic.
On Wednesday, it brought bond yields lower immediately, but not to pre-Covid-19 levels. The yield on the R2030 fell 85 basis points to 11.58% from 12.38%. It has spiked from a 2020 low of 8.68% in February.
The rand gained 1.3% to R17.3011/$.
Stanlib chief economist Kevin Lings expressed some caution over the medium to long term dangers of SA engaging in quantitative easing.
“If the purchases are funded out of printed money then, over a period of time, that could be a problem for SA as we are not a reserve currency and could get penalised by the market.”
Intellidex analyst Peter Attard Montalto said the announcement was a “major Rubiconcrossing moment”.
“The Sarb is not calling it QE. Versus how other central banks started QE it’s also not really QE – it isn’t providing base money reserves in exchange for buying bonds from banks.
“However, it is a quantity measure and a monetary easing measure. The market will as such think it quacks like QE and so is QE. We prefer just to call it ‘asset purchases’, Attard Montalto said.
The Covid-19 crisis, which arrived in SA at a time of a weak fiscal and deteriorating debt situation, will have a major effect on the fiscal framework and the country’s ambitions to consolidate its debt burden.
In the February budget, the 2020/2021 deficit was projected to be 6.8%. It will now probably be far higher, with Attard Montalto projecting 10% and Lings 9.5%.
The bond-purchasing programme was announced on Wednesday morning along with additional measures to extend refinancing operations.
The Bank will also now offer a refinancing operation with a term of three months.
Last week, the Bank changed the rates on its standing facilities — the rate at which the Bank absorbs liquidity — was amended to the repo rate less 200 basis points from repo rate less 100 basis points.
This may be amended further “should it be evident that liquidity is not being transmitted to other funding markets”.
1.3% the rand’s gain on Wednesday to R17.3011/$
Awareness notice: A ‘Stay Home’ billboard is installed on Wednesday on an apartment building on the corner of Long and Kloof streets in Cape Town, before the country goes into a nationwide lockdown for 21 days from Friday to slow the spread of the coronavirus.