Pulling out all the stops to offset the effects of the Covid-19 may do more harm than good, says Chris Loewald, head of the Reserve Bank's economic research department.
In defence of the current policy stance, Loewald, who is a member of the Bank's monetary policy committee, said calls for quantitative easing as a response to a potential depression caused by Covid-19 and the national lockdown would mean jettisoning the same policies that have given SA the space to respond to the crisis.
The proposed alternatives would “trade the symmetry, flexibility and credibility of the current approaches for a false sense of comfort”, Loewald said in an article in Business Day.
The Bank has cut the repo rate by 275 basis points so far this year in an effort to cushion the impact of the lockdown. It has also purchased more than R11bn worth of government bonds in April to ease liquidity pressures and eased rules to allow commercial lenders to boost lending.
That has still fallen far short for some of its critics who think it should embark on an aggressive quantitative easing programme similar to what has been implemented in developed markets such as the US and the eurozone, and even fund the government directly by buying bonds from it. The Bank has consistently argued that such a move would be against its legal mandate and would lead to faster inflation down the line.
“These various alternative proposals have several features in common. One is the claim there is no inflation risk. This allows for the flooding of the economy with money in an effort to use inflation to get more growth,” Loewald said.
“Second, they push today’s economic costs to future generations, either through higher taxes, higher inflation or even lower growth. They hope to create more fiscal resources for spending now by shifting debt service costs from the Treasury to the central bank’s accounts” Loewald said.
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