Not the right time for QE, says Kganyago
Quantitative easing (QE), which has been stepped up by central banks worldwide to support economies during the Covid-19 pandemic, is not an appropriate tool for SA at this stage, Reserve Bank governor Lesetja Kganyago said on Friday.
The Bank, which has cut interest rates to record lows in response to the economic shock caused by the pandemic and the ensuing lockdown, still has space to deploy its existing monetary policy tools, which have not reached the point where they have “ceased to be effective”, he said.
“We would be able to continue to deploy our tools to support the SA economy and we are able to do this in accordance with our mandate, and we deploy these tools as we deem appropriate,”
Kganyago said at online event hosted by Fin24.
Many advanced economies, such as the US, where the Federal Reserve has pumped more than $2-trillion into the financial system through buying government bonds, have reached the point where “conventional monetary policy tools have ceased to be effective”, having already cut interest rates to close to zero in the face of falling inflation.
QE “is not appropriate for SA at this stage”, Kganyago said.
“It is a tool we have, should we be faced with a situation where we think SA is facing deflationary conditions and we would have to deploy it to reinflate the economy.”
The local debate about QE, in terms of which the Bank would buy bonds directly from the government to inject money into the economy, has intensified due to the effect of the lockdown.
The Bank is now expecting economic growth to fall to -7% in 2020, though other estimates have put the contraction as high as -20%, depending on the pace at which the economy is able to reopen.
Unlike developed countries and regions such as the US and Europe, SA is limited in what it can do, as the rand is not a reserve currency. There is a risk that printing more money could cause further devaluation in the currency and rising inflation, Kganyago said.
The Covid-19 shock created pressure in the corporate and government bond market, which led to the Bank announcing a range of measures in March to introduce liquidity into the market, including the move to buy government bonds from banks and asset managers.
Though the move has been viewed as unconventional and bordering on QE, the Bank has maintained that it was done to ease dislocations in the market to enforce price discovery.
“There is nothing unconventional about it; we have always done open-market operations, buying and selling of bonds, to impact on domestic liquidity,” said Kganyago.
The action, in terms of which the Bank upped its holdings of government securities to more than R20bn during March and April, has helped support bond yields after they peaked at more than 13% in late March.
Unlike many other jurisdictions, SA’s inflation rate and interest rates have not yet reached zero, Kganyago said. “We have got the policy room to manoeuvre.”