SA Reserve Bank governor Lesetja Kganyago will deliver the keynote address at a webinar on monetary policy on Wednesday.
The webinar, hosted by the Reserve Bank and the University of Pretoria, comes amid criticism that the bank’s reaction to the Covid-19 coronavirus pandemic has been too conservative.
Some economists suggested that the central bank adopt quantitative easing – the buying of government bonds directly to stimulate the economy.
Kganyago defended his response to the economic downturn in an interview with the Financial Times.
Kganyago said that full quantitative easing was not necessary as South African rates remain above the point at which other central banks have generally had to embrace quantitative easing to get their economies moving.
He said the Reserve Bank “has been the most aggressive” of the few other central banks in developing economies.
Adding that the bank cut its benchmark rate by 300 basis points to 3.5% this year, with the last downward change on July 24, Kganyago said the Reserve Bank responded flexibly, quickly and aggressively to the crisis.
“So far, these actions have improved market functioning and are supporting economic activity. However, the larger economic outlook remains uncertain. We are watching the data closely and we are ready to act as appropriate, in accordance with our mandate,” he said.
He added that the policy rate, now at its lowest in nearly half a century, was also negative in real terms compared to expected inflation next year, showing the “substantial” response from the bank.
Executive director at think-tank The Trade Collective, Lebohang Pheko, said the reaction by the Reserve Bank was a limited response.
“Monetary policy is more than interest rates,” said Pheko.
“Our policy is a bit narrow. Its current function is to protect the value of the rand and inflation targeting – a very market-orthodox economic policy,” she said.
Pheko said the current crisis brought about the opportunity to rethink the Reserve Bank’s economic model and possibly break with market orthodoxy.
In June, several economists, including Wits economics professors Vishnu Padayachee and Chris Malikane, wrote a letter to the Reserve Bank asking the governor to break with old neoliberal dogma.
“The policies of the Reserve Bank and National Treasury have caused immense hardship for this generation, even before Covid-19. The ‘Washington Consensus’ ideology that informed GEAR (Growth, Employment and Redistribution: A Macroeconomic Strategy for SA) wrought huge damage; for instance, wrecking our manufacturing base and making us more vulnerable to the current chaos in global supply chains. The Treasury and the Reserve Bank must now sharpen and apply this vital tool instead of blunting it further. Neoliberal dogmatism of the bank and Treasury has stolen the dream of a better post-apartheid economy for all South Africans,” read the letter.
Duma Gqubule, director at the centre for economic development, added to the conversation by telling City Press that there were so many other policy tools that the bank could use to stimulate the economy.
The bank can finance the government, state-owned companies, development finance institutions and even municipalities as has happened in the US and China.
“If you understand the policy tools, most of the stimulus funds do not have to be spent by the government. We can even set up a temporary public-private agency to bypass government,” said Gqubule.
“The time has come to change the mandate of the Reserve Bank. We need a developmental central bank that will target economic growth, employment, industrial development and inflation. We have been so brainwashed to believe that the only role of the bank is to set interest rates,” he said.
However, Kganyago believes the Reserve Bank is doing enough.
“I challenge anybody who’d dare say that the bank has not done enough and I would say by what measure – because when you see the measures that the Reserve Bank has taken, we can compare it to our peers,” Kganyago said.
The bank “has room to respond” if inflation is persistently under target, he added.
“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.