The SA Reserve Bank said on Thursday that its decision to buy government bonds as part of its attempts to stabilise markets is not a form of quantitative easing” and that it does not seek to influence prices or fund the government directly.
The Bank announced on Wednesday that it would enter the secondary, short-term funding markets to provide liquidity for maturities of up to 12 months to deal with liquidity strains in funding markets in the wake of market volatility sparked by the spread of the coronavirus.
One of the standout measures is a decision to buy government bonds, with deputy governor Fundi Tshazibana saying the Bank will not be sterilising the purchases and will therefore be adding funds to the money supply. The Bank did not specify the time frame or quantum, which will both be at its own discretion.
“No, it is not quantitative easing,” Tshazibana said in an FAQ document posted on the central bank’s website on Thursday. “The Bank is seeking to reduce dysfunctionality in the market rather than determine prices. This may, however, result in price movements as demand and supply come into alignment. This is, however, not the primary objective.”
The bond market has been unable to function for the past week due to a shortage of buyers as investors sought safe havens in the Covid-19 market meltdown. That pushed the government’s borrowing costs over a decade, measured in bond yields, to new records above 12%, from less than 9% in February. This has dire implications for the National Treasury, which must raise an average of R1.1bn a day.
Yields, which move in the opposite direction to prices, dropped sharply and the R2030 was at 11.48% on Thursday, from a record 12.38% two days earlier.
Following the announcement there was much debate among analysts as to whether the measure could be called quantitative easing, the policy adopted by central banks in Japan, the US, UK and the eurozone, among others, to to provide stimulus to their economies after the global financial crisis.
What SA’s central bank has done is different to developed economies, in which inflation is far below target and, in some cases, turned negative, and central banks have used asset purchases to support growth and investment, and to raise the level of inflation.
“The Bank is not seeking to do this. SA does not have interest rates at or close to zero and the Bank is therefore not using this tool as a means to stimulate demand. The Bank’s intervention is a financial market tool aimed at injecting liquidity into the market and ensuring a smoothly functioning market, rather than for economic stimulus purposes,” Tshazibana said
The Bank is also not “monetising the government deficit” — that is, directly buying government bonds to finance spending, she said.
“In terms of the Bank’s legal framework, it is not permissible for the Bank to lend directly to government or to print money to finance the government deficit. The Bank is injecting liquidity into the market and smoothing the market by buying bonds from banks, asset managers or other participants who hold them.”
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