In a defence of the Reserve Bank’s approach to supporting the economy navigate the shock of the Covid-19 crisis, governor Lesetja Kganyago says SA must guard against policy mistakes that could leave it in deeper trouble.
In a speech to the University of Pretoria, Kganyago said the Bank’s approach to monetary policy had enabled it to deliver low inflation, which gave it the room to provide stimulus through the pandemic and the ensuing lockdown that is expected to push the country into its worst recession in about a century.
He again pushed back against proponents of quantitative easing who have accused the Bank, which cut interest rates by a combined 3 percentage points during 2020 to their lowest levels in almost 50 years, of doing too little.
They have advocated that the Bank must help cut the government’s borrowing costs by buying bonds directly from it. The Bank has consistently rejected the move as being out of line with its mandate and likely to lead to a loss of credibility and runaway inflation.
SA needed to “guard against making policy mistakes that could sink us into deeper trouble”, he said. Monetary policy was not the only answer to the country’s underperformance and it was beyond the power of the central bank to ensure permanently high growth.
“Most of our growth problems should be addressed through structural reforms and confidence-boosting measures,” he said, giving the example of power cuts by Eskom as an impediment to the economy that could not be addressed by looser monetary policy.
An explicit change in the Bank’s mandate to include an employment or GDP growth goal was unlikely to be effective, and policymakers already took into account the performance of the economy in their models and decision making, Kganyago said.
“Economic growth requires collaborative effort. It is simply not within the power of one institution to deliver. It is a team sport. It needs contributions from education, from the development finance institutions, from the private sector, and from many other players.”
Though global factors, including the collapse in oil prices, have contributed to lower inflation, countries “with independent, inflation-targeting central banks have lower and less volatile inflation”, he said, contrasting SA with Turkey, which in June had an inflation rate of 12.6%, vs SA’s 2.2%.
Turkey’s higher rate of inflation did not translate to a stronger economy and both countries had GDP growth of less than 1% before Covid-19 hit.
Turkey’s currency hit a new record low last week as the central bank abandoned some of the measures it had implemented to prevent its slide. President Recep Tayyip Erdogan in 2019 dismissed the country’s central bank governor who had resisted his preference for boosting the economy through artificially low interest rates.
“The point here is that the independence of the central bank matters, with the experience of other emerging and developing economies bearing testimony to this,” said Kganyago
In response to a question, Kganyago said that should the central bank make monetary policy decisions based on what this would mean for the state’s cost of borrowing, it would be venturing into the realm of “fiscal dominance”. That would mean the monetary policy authority was no longer making decisions based on its constitutional mandate.
This risked a “fiscal spiral” where higher government deficits led to higher debt and “there is an expectation that the central bank will provide cheap funding either directly or by allowing inflation to rise and in so doing, erode the real value of the [state’s] debt, said Kganyago.
But SA had a finance minister who “understands the limitations of monetary policy”, Kganyago said.
The government had between R200bn and R400bn of debt that is linked to inflation, which means that when inflation rises so does the state’s debt service costs.
“So inflating the debt away in that manner is not an option for SA,” he said.
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