No amount of monetary policy action can lift SA’s economic performance if structural impediments, such as poor electricity supply, are not dealt with, Reserve Bank governor Lesetja Kganyago says.
The Bank, which has had to fend off criticism that it could have done more to safeguard the economy since the outbreak of Covid-19, despite cutting its main interest rate to the lowest level in about half a century, can do very little about the factors that have held SA back over the past decade, Kganyago told Tim Modise on Business Day TV’s current affairs show, Political Currency.
Even as the economy made a tentative recovery after the national lockdown was eased in July, Eskom was still unable to keep the lights on, he noted. The economy was hit with power cuts, despite the lockdown ceasing activity across the board since March, with GDP contracting 51% in the second quarter on an annualised basis.
“In July, the country was hardly growing; we had just reopened the economy” and yet there was load-shedding, Kganyago said. “You can’t solve that problem using monetary policy.”
The Bank has cut the repo rate by 300 basis points in 2020, but last week kept it unchanged at 3.5%. The monetary policy committee voted 3-2 to keep the rate unchanged, despite downgrading its inflation and GDP forecasts. It sees the economy shrinking 8.2% in 2020 and inflation averaging 3.3%, near the lower end of its 3% to 6% target range, and well below the midpoint where it says it wants the rate anchored.
Since March, it has also reduced regulatory requirements on banks to help stimulate lending during the crisis, and bought government bonds in the secondary market to help stabilise the functioning of the market.
“We acted with scale and we acted with speed,” Kganyago said, adding that much of the stimulus — which will take between 12 and 18 months to feed through to the economy — has yet to take effect. Many business activities, such as vehicle and property sales, were restricted or prohibited during the various phases of the lockdown.
SA needs to grapple with structural reforms to lift the potential growth of economy and “there are no quick fixes”, he said.
Though the Bank expects the economy to rebound in the third quarter, this will merely reflect the resumption of activity after the lockdown was eased and is not a reason to stop seeking solutions for “long-term problems”, he said.
Kganyago also addressed criticism of the Bank’s failure to follow the example of counterparts in developed countries and start a programme of creating new money and buying government bonds — outright quantitative easing — as a way to support demand and ease government’s borrowing costs.
He reiterated that this is not an appropriate monetary policy tool for SA, which still has conventional policy tools at its disposal, with neither its main interest rate nor inflation approaching zero or threatening to turn negative.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.