Reserve Bank running out of space to keep lowering interest rates – Kganyago


The SA Reserve Bank has slashed the repo rate by 275 basis points this year to provide relief to indebted consumers and businesses as they navigate the economic shock of the coronavirus pandemic. But the central bank is slowly running out of space to further lower interest rates in response to the crisis, says Governor Lesetja Kganyago.

Kganyago was speaking during a webinar on Sunday evening about the impact of Covid-19 on South Africa.

Responding to a question about whether the bank has done enough to cushion the pandemic's blow on the economy, Kganyago said buffers the bank had created in the past granted it greater leeway to respond by, for instance, cutting rates. 

"We had buffers and we could dig into the buffers," he said.

"There are 68 central banks in the world which adjusted the policy rate. We are among the ones which adjusted most aggressively. Partly because we had the space to do it." But the governor said the bank was beginning to run out of space to further lower rates. 

The bank lowered the repo rate from 4.25% to 3.75% last week, a level last seen in the 1970s. At the time Kganyago said rates may fall by a further 50 basis points over the next two quarters. BNP Paribas, meanwhile, believes a staggered rate cut of 75 basis points in the current cycle is likely. 

With inflation close to the midpoint of the bank's 3% to 6% target band, the Reserve Bank could initially rapidly lower the repo rate to deal with the shocks created by Covid-19. "We had that buffer to dig into and inflation was contained," he said.  

The rate cuts eased some pain for consumers, but the effects have not yet been felt on the economy, which is still on lockdown, Kganyago added. 

The governor said the central bank had also built in buffers in the regulatory framework for the financial sector by, for example, placing liquidity and capital requirements on banks. These requirements were lowered after the pandemic struck, meaning bank's could dip into these reserves.

"We could relax regulation in support of the banking sector, which was providing relief to businesses and households," said Kganyago.

The Reserve Bank has partnered with National Treasury and large private banks to launch a R200 billion loan guarantee scheme to extend loans to businesses with an annual turnover of less than R300 million for operational expenses, Fin24 previously reported.

The bank also responded to the crisis by injecting liquidity into the markets by buying more SA government bonds to deal with 'dysfunction'. 

An arsenal of instruments 

"Monetary policy had put us in a situation, where we did not just deploy one instrument at a time. We could deploy an arsenal of instruments, in accordance with our mandate, to ensure the SA economy is actually cushioned from the shock experienced from Covid-19," he said.

The pandemic had also exposed the structural flaws of the SA economy, said Kganyago. 

"We were hit by the shock and the SA economy had significant structural flaws that we kept on talking about instead of dealing with," he said. Kganyago said the time had come to reposition the SA economy. Instead of working towards a world after Covid-19, which won't happen until a vaccine is found, South Africans should rather focus on managing the economy in the "era of Covid-19", he said.

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