Sarb shuns flawed policy to support economy

South Africa’s central bank will steer clear of policies that have failed throughout history as it continues supporting an economy devastated by the coronavirus pandemic, Governor Lesetja Kganyago said.

Critics of the Reserve Bank have over the past four months called for it to implement aggressive quantitative easing and bankroll the state, which was already under severe financial strain before the pandemic hit, to prop up the economy. That’s even as it’s cut the benchmark interest rate to a record low, relaxed accounting and capital rules to promote lending, and more than tripled its holdings of South African government debt.

This is not “a time to venture into policies or instruments that have proved a failure in economic history,” Kganyago said in an address at the bank’s 100th annual general meeting.

The Reserve Bank has been adamant that its buying of government debt in the secondary market since March is aimed at reducing market dysfunction, and is not quantitative easing. Kganyago warned last month that financing the government’s growing budget deficit would ultimately bankrupt the central bank, adding more strain on the National Treasury.

Downward cycle

South Africa was stuck in its longest downward cycle since World War II and its economy contracted for three quarters even before the virus hit and restrictions to curb its spread were imposed. Central bank forecasts show gross domestic product probably dropped an annualised 32.6% for the three months through June and it projects a contraction in GDP of 7.3% this year.

Lifting the country’s potential growth rate cannot be left to the central bank alone and also requires prudent macroeconomic policies, structural reforms and a lower cost of capital to support increased long-term investment, Kganyago said.

“To place our economy on a sound and sustainable growth path, the South African Reserve Bank stands ready to provide support to the economy within its mandate,” Kganyago said. “Lower longer-term inflation outcomes are important for maintaining purchasing power, containing the costs of living and of doing business, and supporting our country’s global competitiveness.”In line with its price-stability mandate, the central bank targets inflation in a band of 3% to 6% and has lowered the benchmark interest rate by 300 basis this year.

The financial system remain resilient, even as pandemic-driven increases in the issuance of government debt, higher credit risks faced by lenders and periods of market stress and volatility have heightened risks, Kganyago said. The bank will continue to monitor the system for signs of stress and take necessary steps to mitigate risks, he said.

© 2020 Bloomberg

Source: moneyweb.co.za