Bank has been aggressive in response to Covid-induced downturn, says Kganyago
Reserve Bank governor Lesetja Kganyago has defended the Bank’s response to the coronavirus-induced economic downturn, calling it “aggressive”.
In an interview with the Financial Times, the governor challenged “anybody who’d dare say that the [SA Reserve Bank] has not done enough, and I would say by what measure — because when you see the measures that [it] has taken, we can compare it to our peers”.
The Bank “has room to respond” if inflation is persistently under target, he said.
Inflation recently fell below the Bank’s target range of 3%6%, yet analysts anticipate just one more repo rate cut of 25 basis points in 2020.
Kganyago insisted in the Financial Times interview that aggressive the Bank ”“has bar few been other the central most banks in developing economies. The Bank has cut its benchmark rate by 300 basis points to 3.5% over the course of this year.
He said that the repo rate, which is now at its lowest in nearly half a century, is negative in real terms versus where inflation is expected to be in the next year, showing the Bank’s “substantial” response.
The central bank has also been active in the secondary bond market, buying up about R38.4bn in government bonds by end-July since introducing its bond-buying programme in March to tackle liquidity constraints.
However, despite the Bank’s supportive measures, the governing ANC has demanded that it play a more direct role in stimulating economic growth, urging that its mandate be broadened to include this.
Trade union federation Cosatu has meanwhile urged the Bank to slash interest rates to support an economy devastated by the lockdown and its restrictions on business activities.
The ANC said in its economic reform discussion document released in July that the Bank “must be better co-ordinated with fiscal policy” and should pursue “pro-growth and proinvestment” monetary policies.
Deputy finance minister David Masondo has also indicated that he is personally not opposed to greater bond buying by the bank.
The Financial Times report noted calls by trade unions and some economists for the Reserve Bank to adopt quantitative easing — buying government bonds directly to stimulate the economy.
Kganyago said full quantitative easing was not necessary because rates remained above the point at which other central banks have generally had to adopt quantitative easing to get their economies moving.
The Financial Times reported growing pressure from parts of the ANC to directly fund the government or to accept high inflation to reduce the real value of its debt, as public finances are set to deteriorate further in coming years.
“At about 16% of GDP, this year’s budget deficit is expected to be larger than the country’s annual pool of domestic savings, burdening local appetite for government bonds,” the report said.
“At the same time it has become harder to attract foreign investors to SA’s sovereign debt market after the country lost its last investment-grade credit rating earlier this year.
“Foreign ownership of localcurrency debt is about 30%, the lowest in almost a decade, according to data.”
As a result, Kganyago said, “SA is at risk of fiscal dominance” or pressure on the Bank to find ways to ease the load on the government’s finances.
But there were strong institutional safeguards to prevent that, including the central bank’s independence and its constitutional mandate to deliver stable prices, he said.
Even if a pliant central bank did agree to stoke inflation for fiscal reasons, it would not help the government with its finances, Kganyago said.
State debt in the form of hundreds of billions of rand in bonds is linked to inflation and will pay out more if prices rise.
“Trying to inflate the debt away is not an option,” the Bank governor said.
“Of course, there could always be central bankers who are pliable, who could overlook their responsibilities in terms of the constitution, but this one is not about to,” he said.
THE RESERVE BANK HAS CUT ITS BENCHMARK RATE BY 300 BASIS POINTS TO 3.5% OVER THE COURSE OF 2020