Clamour for Bank to splash out
Masondo in good company as desperate economy eyes Reserve Bank’s balance sheet
● Most economists expect the Reserve Bank’s monetary policy committee (MPC) to opt for yet another large interest rate cut when it next meets this month.
But the real debate is not about conventional monetary policy tools such as interest rates. It is about more unconventional tools, such as buying bonds — and to what extent the Bank should be using its balance sheet to support the economy or help the government finance the public debt.
It’s a hot global debate, with central banks in the UK and US injecting vast quantities of cash into their markets — using what some dub the “magic money machine” — to try to lift their economies in a context in which interest rates are near zero and conventional monetary policy is of little use.
It’s a debate that’s been going on in SA too, and it made fresh headlines last weekend when deputy finance minister David Masondo raised the question of whether the Reserve Bank should not act as “lender of last resort” for the government in the current crisis, telling an ANC political education meeting and the Sunday Times that he supported the idea of the Bank purchasing government bonds directly from the Treasury.
The idea may be a particularly sensitive one in an emerging market such as SA because of the way the central banks of countries such as Zimbabwe and Venezuela have given in to political pressure to buy bonds to monetise away the public debt, enabling unchecked spending and hyper-inflation.
It’s one thing when advanced economies, with reserve currencies such as the dollar, do “quantitative easing” and buy bonds — but quite another when a small, open, emerging market with a vulnerable currency does it, and the debate is not simple.
Masondo will quickly have realised that a deputy finance minister is not just some academic throwing around ideas. Coming from a minister, this could be seen as interfering with the Bank’s independence. He hastened to follow up with a statement emphasising the need to respect that independence.
His comments still elicited a tart response from Reserve Bank governor Lesetja Kganyago, who told an Investec webinar that he would not respond to Masondo, saying, pointedly, that the Bank does not comment on fiscal policy (and, by implication, a deputy finance minister shouldn’t be commenting publicly on monetary policy, even though the Bank and Treasury consult with each other privately and frequently).
However, said Kganyago, “there is a debate in the central banking community about bond purchases and the extent to which central banks should do them”.
He went on to say that the Bank’s approach to bond purchasing is guided by legislation that limits how much government debt the Bank can purchase in the primary market (buying new bonds directly from the Treasury, rather than doing secondary purchases in the bond market).
In addition, as a member of the Southern African Development Community, SA is bound by a treaty limiting central banks to providing no more than 10% of funding to their governments. “That said, what we do with bond purchases is a monetary policy instrument where the Reserve Bank has got full operational independence,” he said.
But as the governor’s response suggests, it’s no longer whether the Bank intervenes in the market to buy government bonds but when and why and how much — an operational issue rather than the kind of ideological issue it’s sometimes been.
Since the start of the crisis the Bank has already gone further than ever before in its use of conventional and less conventional measures to support the economy and the markets — providing considerably more support and stimulus than the government has through fiscal means.
The Bank has cut interest rates by a cumulative 225 basis points, freeing up an estimated R73bn of spending power, and, with inflation heading towards the bottom end of the 3%-6% target range, economists expect the MPC to make a further 50- to 100-basispoint cut when it next meets on May 21.
It is necessary to respond in ways which reduce long-term risks Andrew Donaldson
Former Treasury deputy director-general
The Bank has also used its powers as prudential regulator of the banking system to ease capital and liquidity rules to enable banks to assist financially distressed customers, freeing up more than R300bn of potential assistance, and has partnered with the Treasury and the banking system on the R200bn loan guarantee scheme.
And then there’s the buying of bonds in the secondary market, which the Bank had to embark on, initially reluctantly, when the bond market completely dislocated in late March as investors fled from risk, globally and locally, and bond yields spiked, driving up the cost of government borrowing. It has bought a total of almost R13bn of bonds on the market in terms of the programme so far.
The Bank insists it is simply injecting liquidity into financial markets to ensure stable market functioning and proper price discovery. But with the government’s deficit ballooning and questions raised about whether the market — and the entirety of SA’s R750bn savings pool — will be able to absorb a huge increase in government bond issuance over the next couple of years, it’s not just the Left ideologues of old urging the Bank to intervene to a greater extent than it has done so far. Masondo is in good company.
Former Treasury deputy director-general (DDG) Andrew Donaldson has proposed a bond purchase programme of R10bn-R20bn a week until economic recovery is well under way, to strengthen market liquidity and shift market expectations to lower long-term bond yields. “Faced with a self-fulfilling loss of confidence in the whole economy’s future, it is necessary to respond in ways which reduce long-term risks, and which signal the commitment of the authorities to do everything that needs to be done to ensure that the economic future is secured,” Donaldson, who is now at the University of Cape Town, wrote in a recent policy brief.
Another former Treasury DDG and budget office head, Michael Sachs, has written that the Bank’s balance sheet will require careful consideration, suggesting stronger action may be required to hold down the long-term interest rate faced by the government and all domestic borrowers.
Clearly, there is thinking going on within the Bank too. It will be keeping a careful eye on the risks — the need to retain market confidence and credibility and prevent a currency crash and inflation if it goes too far, but also the “moral hazard” that fiscal discipline could be lost. But as recent weeks have shown, it will be pragmatic — and may be willing to go where it has not gone before.