Quantitative easing (QE) as a monetary policy tool entered economic parlance not so long ago. It has been applied by central banks for the large purchase of government bonds in the secondary market. In some jurisdictions, as in the case of the US Federal Reserve, it has also included the purchase of private assets containing credit risk.
Today, as during the 2008/2009 crisis, central banks have decisively deployed QE and other unconventional tools. Failure to do so would condemn their economies to slump for many years to come. They are very aware that a cut in interest rates alone in a downturn, let alone in the severe downturn of Covid-19, cannot generate enough private-sector demand for credit when the general outlook for firm profitability and household income is weak.
Indeed, in the 1990s Japan slump, a combination of the much-vaunted structural reforms and lowering of interest rates from 7% to 0.001% failed to boost growth. It is fallacious to bank on rate cuts.
Thus, in addition to the current bond-buying programmes (or QE) of Philippines ($6bn), Colombia ($2.5bn), Turkey ($2.5bn and $9bn of credit rediscount), Nigeria ($2.8bn QE for developmental programmes), Poland ($17bn) Brazil ($197bn excluding government bonds, which are to be added later), these and many other central banks have provided monetary financing (UK and Nigeria) and extensive credit support to manufacturing, agriculture and other critical sectors.
Of all these developing nations, none has rates near zero or price stability as their mandate.
Are these and others nations’ QE and related efforts inconsistent with a price stability mandate? Unless the motive is to pursue economic destruction, these efforts achieve both the narrow price stability mandate and broader macro-economic recovery and stabilisation goals.
Indeed, SA economists correctly observed that the Reserve Bank had finally embarked on a much-needed QE upon its announcement of the purchase of government bonds. As expected, however — aware that the governor had not long ago publicly said that QE can only be deployed when both the interest rates and inflation were close to zero — the Bank immediately issued a media statement saying its bond-buying programme is not QE but intended for price discovery purposes following a high price volatility.
The phrase QE was coined and suggested for implementation at a time when interest rates were about 6% in Japan, where the phrase originated
But why should Bank deny doing what is critically necessary for macro-economic stabilisation at a time when such an act is of high national interest? According to all known authorities, one of the key objectives for the deployment of QE during and after a crisis is to suppress the high price volatility and the ensuing financial market dislocations, which impair price discovery. It is also to rein in the spike in the yield curve.
As I argued elsewhere in 2019, statements by Bank governor Lesetja Kganyago that the deployment of QE requires interest rate/inflation to be zero or near zero, have no basis in QE theory, let alone in evidence. That “group think” holds QE to be so does not make it correct. Had Kganyago understood the macro-economic model that gave rise to the concept of QE and applied it, the devastating destruction of SA economic value would have been saved.
What is more, the phrase QE was coined and suggested for implementation at a time when interest rates were about 6% in Japan, where the phrase originated.
Indeed, as many analysts — including Brian Kantor and Chris Malikane — have observed in their recent, separate articles, the Bank’s bond-purchase programme, though badly implemented, is correctly termed QE. They are also both correct in suggesting that one of the effects of this programme is to lower the term structure, with demand stimulation as its macro-economic consequence.
Sadly, these will not be achieved in SA due to the Bank’s incompetent handling of its QE.
In his further analysis, Kantor went on to say that the increase in bank reserves has the effect of increasing both bank lending and inflation. This view, also held by the Bank, the National Treasury and most economists, is wrong. It is based on the long-discredited myth called the money-multiplier model. Sadly, it is this misconception upon which Kganyago’s zero interest rate/inflation fallacy is based.
Monetary policy, not the interest-rate policy the Bank incorrectly focuses on, is a powerful macro-economic lever, as demonstrated the world over. There is so much the Bank can do to not only pull the country out of its 12-year slump and now the recession and coronavirus, but also manage both the long and short rates within a benign debt and inflation environment. This is possible even in the current restrictive SA Reserve Bank Act, which, nonetheless, requires urgent overhaul.
SA would not have found itself in this economic slump had it not been, in large measure, for the Bank’s strange conduct of its “monetary policy”. This high cost to the nation will be with us for generations and should not be allowed to continue any longer.
• Nkosi is executive director at Firstsource Money and founding executive board member of London-based Monetary Reform International.
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