Global easing wins breathing space for SA

THERE are unprecedented monetary policy actions currently being conducted by several advancedeconomy central banks.

These actions are indirectly providing relief to central banks presiding over twin-deficit economies with low growth and high inflation — such as South Africa.

In the eurozone, growth has been improving — but at a glacial pace.

Last year, the eurozone economy grew by a mediocre 1.5% and is expected to grow by less than 2% over the next two years.

Also, eurozone inflation has been nowhere near the European Central Bank’s (ECB) target of close to but below 2%. In fact, the region has been flirting with deflation, a general decline in the price level.

The average inflation rate in the eurozone last year was 0%. Inflation is generally expected to remain below 1% this year and next year, which will mean a persistent undershoot of the central bank’s target.

To combat low growth and low inflation, the ECB has made innovative use of its policy tools. First, it has lowered interest rates. It has three policy rates on which it can act. Of these, the deposit rate, the rate banks earn for depositing money with the central bank, is negative, having been reduced earlier this month to minus 40 basis points. This means banks have to pay the ECB for making deposits.

The refinancing rate, the rate banks pay for borrowing from the ECB for periods of up to a week, was lowered by five basis points to 0%.

Second, the European Central Bank expanded its asset purchase, or quantitative easing programme.

It will now be buying à80- billion (about R1.37-trillion) of investmentgrade euro-denominated bonds, including those of corporations, each month.

Finally, the ECB is introducing further longer-term bank lending. These targeted long-term refinancing operations offer cheap longer-term loans to the eurozone banking sector.

The Japanese economy is similar to that of the eurozone. Growth is weak, averaging less than 0.5% last year. It is expected to be below 1% in 2016 and 2017. Also, inflation is below 1% and is expected to remain well below the inflation target for at least the next two years.

The Bank of Japan has also acted to stimulate weak growth and boost inflation. Its main policy rate, the overnight call rate, has also been reduced to negative territory. It is currently at minus 10 basis points. The bank is also flooding money into the economy via its own asset purchase programme.

With its peers moving aggressively in the opposite direction, it was only a matter of time before the US Fed capitulated on its intention of raising rates meaningfully.

At its meeting last week, the Fed reduced its guidance on where it expects its policy rate to end the year by 50 basis points — signalling two rate hikes this year instead of four.

South Africa can now probably get away with raising rates by less

One of the problems confronting the Fed in its previous signalling of a relatively aggressive hiking cycle was that it was causing broad dollar strength, which was hurting the US recovery by impeding US exports, corporate profits and business fixed investment.

In contrast, the eurozone and Japan were benefiting from low rates and weaker currencies.

The aggressive easing by the ECB and the Bank of Japan, which has led to a more dovish Fed, is relieving pressure on emerging-market central banks. Those that are less vulnerable, such as banks in East Asia, are finding room to ease.

The fundamentally weaker twindeficit commodity exporters with untidy political arrangements, like South Africa, can now probably get away with raising rates by less.

Unless, of course, even more irrational political actions take place.

Nxedlana is FNB chief economist