The Reserve Bank governor says cutting interest rates was the right decision
The governor of the SA Reserve Bank, Lesetja Kganyago, has hit back at macroeconomic policy critics who have labelled his policy decisions on how the bank responded to economic shocks the country has faced over the past decade – exacerbated by the Covid-19 pandemic – as “too conservative”.
In an interview with the governor this week, ahead of the release of the Monetary Policy Review report, Kganyago said that, for the first time, he had had to ward off attacks from all sides of the economic spectrum.
“It hasn’t been easy because, in the past, the attacks used to come from the left. This time they came from the left and the right.
“They said: ‘You guys are conservative.’ I insist I’m not a conservative. We’re prudent, yes, but you can’t call us conservative,” said Kganyago, defending the Reserve Bank’s inflation-targeting policy framework.
Reflecting on the economic conditions over the past two years, Kganyago said the Covid-19 crisis had come at a time when South Africa’s economy was already vulnerable and in a technical recession.
Real GDP had contracted at an annualised rate of 0.8% and 1.4%, respectively, in the last two quarters of 2019. This was due to falling export demand, weak business confidence and investment, and the return of Eskom’s load shedding.
At the time, the country had also experienced an increase in capital outflows and significant currency weakness between March and April last year. The rand had depreciated by 22% between February and the end of April. Over the same period, the yield on the 10-year government bond had risen by more than 200 basis points, money market liquidity had been thin and GDP contracted by 7% last year.
In response, the monetary policy committee had cut the repurchase (repo) rate by 2.75 percentage points between March and July last year in direct response to the Covid-19 pandemic, and has since left it steady at 3.5%. The bank had also put in place intraday overnight supplementary repurchase operations, aimed at providing liquidity support to commercial banks twice a day.
A three-month repo facility, offered in addition to the weekly main refinancing operations, had also been introduced. The end-of-day lending rate on the standing facility had been reduced from repo plus 100 basis points to the repo rate. The Reserve Bank had also launched a programme of purchasing government securities in the secondary market, said Kganyago.
“But did this mean that the shouting at the Reserve Bank stopped? No, it didn’t. Actually, from some quarters, it became even louder. ‘You’re not doing enough, you’re conservative!’ they said.
“When we experienced a shock from Covid-19, the Reserve Bank reacted with speed to provide support. We were able to do this because, prior to the shock, inflation was contained at the lower end of the bracket. If inflation were high, we wouldn’t have been able to provide the kind of support we did,” said Kganyago.
It is this very focus on interest rates, inflation-targeting and price stability – whose proponents say also supports economic growth and stability – that has become the focus of criticism.
Duma Gqubule, founding director at the Centre for Economic Development and Transformation, said it was absurd that in the worst pandemic of the past century, the governor was still talking about inflation.
“We’re experiencing the biggest deflationary shock in our country’s history and he’s concerned about inflation! South Africa should change this outdated monetary policy mandate that isn’t fit for purpose.
“A central bank isn’t there just to set interest rates,” said Gqubule, adding that the Reserve Bank should consider more policy instruments such as providing direct funding to government on favourable terms, targeting exchange rates to support exports and providing direct funding to companies.
Gqubule said the governor was still too conservative in his monetary policy approach and that, while buying government bonds in the secondary markets was a good start, it was not aggressive enough to be considered a real stimulus.
Lebohang Pheko, an economist and executive director of Trade Collective, said any central bank could deliberately or inadvertently affect the profitability and access to credit of different industries and sectors of the economy.
“Our Reserve Bank can allocate particular benefits to different types of businesses, including small, medium and micro-enterprises; social enterprises; cooperatives; and local government. It can also finance infrastructure development. So this isn’t about printing money, but about allocating funding intentionally in key sectors of the economy,” said Pheko.
Redge Nkosi, an economist and research head at Firstsource Money, said he was not aware of any country that had developed the status of its economy by using interest rate policies.
He said that, in living memory, all reserve banks had always intervened in the economy by directing money to its productive sectors.
“The governor knows that when we say ‘print money’ or ‘issue money’, we’re saying that money must go to institutions like the department of trade, industry and competition, which is in charge of economic and industrial development in this country,” said Nkosi.
City Press suggested these alternative policy instruments to Kganyago.
He responded: “Direct money to productive capacities of the state like what – SAA? That’s exactly what they did. They [National Treasury] gave SAA money in the middle of a crisis. We’re facing a health crisis and they decided to give SAA money!”
He said the Reserve Bank did not need to fund state programmes and sectors because state institutions such as the Industrial Development Corporation and the Development Bank of Southern Africa were “sitting on money”.
Kganyago said the point was not to choose which sectors should or should not be financed, as these were fiscal policy decisions in the hands of government – not monetary policy decisions.
“Monetary policy sets the price of money across the economy. Governments decide how much goes to health, how much goes to education, how much goes to SAA, how much goes to Eskom and the Land Bank.
“It isn’t for a central bank, run by technocrats who weren’t elected, to make those decisions.
“They have to be made by people who were elected so that when that money is stolen, they must explain. Not us,” said Kganyago.
Defending the mandate of the Reserve Bank, he said that as a result of interest rate cuts, borrowing costs were at their lowest level in five decades and the economy was continuing to recover.
He added that the decision to cut interest rates in the second half of last year supported households, companies and government.
“The biggest beneficiary of the ultra-low short-term rates has been the public sector,” he said, explaining that the decision to cut rates had reduced overall public-sector funding costs, as well as the effective interest rate on government debt, to about 6% – in sharp contrast to borrowing costs of about 9% at longer maturities.