The role of the SA Reserve Bank has been brought into question yet again as the Covid-19 pandemic tears through the country and the economy.
Some economists and analysts have called for the bank to expand its existing mandate and use other monetary policy tools at its disposal to help pull South Africa out of its economic slump.
Reserve Bank governor Lesetja Kganyago said the bank’s inflation-targeting framework was the most functional part of the macroeconomic framework, adding that its independence was key to price stability and that quantitative easing – the buying of government bonds directly to stimulate the economy – would be ineffective in South Africa.
Kganyago was speaking at a webinar hosted by the University of Pretoria on Wednesday, with the theme Monetary policy in the shadow of Covid-19.
“We have symmetric price stability mandates, expressed in inflation targets, which tell central bankers to avoid too high and too low inflation. We have floating exchange rates that absorb shocks rather than magnify them, and our accumulated credibility is now such that we can slash interest rates, despite large exchange rate depreciations. We have financial stability mandates to ensure that the financial system keeps functioning under stress and that too-big-to-fail institutions don’t,” he said.
In fact, Kganyago added, the inflation-targeting era had been one of lower inflation and lower interest rates than prevailed previously. Inflation had been kept under control.
The Covid-19 crisis struck at a time when South Africa’s economy was already vulnerable and technically in a recession. Real GDP had contracted at an annualised rate of 0.8% and 1.4%, respectively, in the last two quarters of last year. This was due to falling export demand, weak business confidence and investment, and the return of load shedding.
According to the Reserve Bank, South Africa also experienced an increase in capital outflows and significant currency weakness between March and April. The rand depreciated by 22% between February and the end of April. Over the same period, the yield on the 10-year government bond rose by more than 200 basis points, money market liquidity was thin and GDP declined by 7.3%.
The Reserve Bank reacted by cutting its benchmark rate by 300 basis points to 3.5% this year, with the last downward change implemented on July 24.
The bank also put in place intraday overnight supplementary repurchase operations aimed at providing liquidity support to commercial banks.
A three-month repo facility, offered in addition to the weekly main refinancing operations, was introduced. The end-of-day lending rate on the standing facility was reduced from repo plus 100 basis points to the current repo rate. The Reserve Bank also began a programme of purchasing government securities in the secondary market.
That focus on interest rates, inflation targeting and price stability has become the subject of much debate.
Lebohang Pheko, executive director at think-tank The Trade Collective, said South Africa’s monetary policy should be about more than interest rates.
She said the current crisis created the opportunity to rethink the Reserve Bank’s economic model and possibly break with the market orthodox, neoliberal construction of fiscal and monetary policy.
She said there needed to be a level of elasticity and agility to respond to what was happening in the immediate context, and that monetary policy could not simply be about “slashing repo rates every now and again”.
“The Reserve Bank should play an interventionist role in the economy. Even with its particular mandate, we can do much more than the bank is doing,” said Pheko.
Any central bank could deliberately or inadvertently affect the profitability and access to credit of different industries and sectors of the economy, she explained. The Reserve Bank could allocate particular benefits to different types of businesses, small and medium-sized enterprises, social enterprises, cooperatives, and local governments.
“I say this because some central banks are able to directly finance lending to businesses even within the space of Covid-19,” said Pheko.
She added that the Reserve Bank could finance infrastructure development: “It isn’t about printing money – it’s about the way we allocate funding intentionally into key sectors.”
Pheko said the Reserve Bank could also intervene by financing a tax cut or making direct transfers to households.
“I’m not talking about the R350 for people who’re on social welfare or not on the grid. I’m talking about a dividend that would be a nonrepayable grant to citizens at a time when workplaces are under pressure to retrench.
“We need to get away from the idea that the only mission of the Reserve Bank is ensuring price stability, adjusting interest rates and targeting inflation. That’s a very narrow construction of its role. I think it can be as activist as it can be interventionist when the time and context require,” she said.
In his talk at the webinar, Kganyago stressed the importance of maintaining the independence and credibility of the Reserve Bank: “We have good evidence that countries with independent, inflation-targeting central banks have lower inflation and less volatile economies. And we can see that there are still countries with high inflation rates, despite low global inflation. Examples of this are hyper-inflation cases, such as Venezuela and Zimbabwe.”
The argument of independence and credibility has been central to conversations about the mandate and role of the Reserve Bank. Pheko, however, believed these issues were not the point.
“The problem for me isn’t the role or mandate of the Reserve Bank, but the unwillingness to even have a conversation about them. Every time there’s an attempt to shift the conversation, we’re told the credibility of the Reserve Bank’s independence is critical.
“The point of contention is who polices the Reserve Bank and to whom it’s accountable – its 750 shareholders. Even though they claim to be apolitical and depoliticised, there’s clearly a level of political manoeuvring taking place. That, in itself, is a political act and shows a far deeper, unseen machination,” said Pheko.
In his study titled South Africa’s Moribund Economy: Searching for Economic Recovery, Employment and Growth in the Wrong Places, Redge Nkosi, an executive director and research head at Firstsource Money, wrote that the Reserve Bank’s warnings about currency debasement and inflation, against ideas beyond its interest rate policy reach – such as quantitative easing, credit guidance and others – were misguided.
Nkosi said the Reserve Bank could simply delink or divorce the quantity of money (reserves) from the interest rate target and thus also from the policy rate. This seemingly innocuous technical approach had far-reaching implications.
The Reserve Bank’s current interest rate policy had failed and would forever fail, he declared.
By justifying the refusal to deploy large-scale quantitative easing on the grounds that excess reserves could lead to inflation and related costs, the Reserve Bank governor had opened himself up to those with technical nous on the matter, said Nkosi.
Kganyago had told policy critics that getting South Africa’s monetary policy right would not be enough. The country’s debt situation was critical, and it needed to find a path back to fiscal sustainability and growth.
“In the current circumstances, we think a quantitative easing programme doesn’t make much sense for South Africa. Specifically, we’ve been buying bonds in the secondary market, at different maturities, in the context of a sudden stop in global capital flows,” said Kganyago.
“As the central bank, we have unique powers to provide liquidity and we’ve used them to restore market functioning. These interventions have been helpful so far. Yields have fallen. We didn’t set out to lower yields, specifically, but it turns out that market dysfunction was part of the reason yields were so high.
“We’re in very difficult circumstances, but quantitative easing isn’t the answer. We need to focus on real solutions,” said Kganyago.