ANC secretary-general Ace Magashule may have belatedly got his way. It was about 10 months ago that he shocked markets with an announcement that the governing party wanted the Reserve Bank to consider a policy of “quantity easing” (sic).
After the central bank on Wednesday unveiled new measures to inject liquidity into financial markets, some assumed governor Lesetja Kganyago had finally caved in. Not so fast. At least that's the Bank's preferred narrative. Were people overly fixated on one part of the Bank’s statement?
“As a further measure to add liquidity to the market, the SARB will commence a programme of purchasing government securities in the secondary market. The purchases will be conducted across the yield curve,” the Bank said.
Central banks in Europe, Japan and the US have been buying huge amounts of government bonds to suppress borrowing costs and encourage risk-taking by raising the cost of holding the safest assets. Over time, they expanded the pool of assets to include mortgage-backed debt and corporate bonds.
It looks similar to what was announced by the Bank, but does that make it the same thing? In other countries, QE was started when interest rates were already close to or below zero and central banks were battling to stimulate inflation, and growing ever more fearful of deflation — a prolonged and damaging drop in consumer prices.
The policy aimed at propping up bond prices, but for completely different reasons. Ultimately, policymakers hoped it would encourage banks to reduce their holdings of the assets. It’s hardly conceivable that Kganyago wants investors to dump SA bonds.
In Europe, the central bank acted on the assumption that higher bond prices, which translate to lower yields, would encourage banks to sell them, and use the extra cash to support the real economy. Awash with all this extra liquidity, the theory went, commercial banks would get the confidence to lend to businesses and households, boosting spending and prices, and ultimately moving inflation closer to target.
It’s clear from the Bank’s statement that it has a different agenda, and would probably want this to be seen as a sign that what it's doing isn't QE. Granted, it hasn’t done a great job, at least to the layperson, of explaining that. It might have been helpful to include an easy-to-understand explanation of how what it’s doing is different.
But it’s not the only central bank to have been caught in the middle of such a misunderstanding. The US Federal Reserve did something similar in an attempt to ease a cash shortage that caused short-term borrowing costs to surge. The expansion of its repo operations and purchases of short-term Treasury bills from late 2019 raised similar questions about whether it had indeed resumed QE.
In SA, the Bank said asset purchases would allow it to “enhance its monetary policy portfolio (MPP)”, which is one of the instruments it uses for money-market liquidity and can be used to add or drain liquidity from the market.
There is an explanation on the Bank’s website about how this process, which it uses to drain liquidity through reverse repos, works. That this existed before Wednesday should be another clue that bond purchases by the Bank are not a new invention created to cope with the coronavirus outbreak. If this is QE, then one might as well argue that SA had always had quantitative easing and wonder what the fuss has been about.
“The Bank sells bonds from its MPP in terms of repurchase agreements, and pays the interest rates tendered by the counterparties (mostly banks) on the cash that it withdraws from the market,” it says on its website. In the MPP the Bank holds about R8bn in bonds. What's not clear is whether and how the new operation is different.
Outside the technicalities, the most important point, as Kganyago has always been at pains to explain, is that the bank is far from exhausting its conventional tools. The 100 basis-points cut last week took the repo rate to 5.25%, so it has a long way before it gets to zero. Inflation is also far from levels that would justify the use of such extraordinary measures.
The statement also said the liquidity steps should not even be seen as “providing any signals” for future monetary policy and it's all about liquidity. Not everybody is convinced and some have argued the purchases are aimed at influencing monetary policy and are therefore QE.
For a Bank that has come under attack for its alleged conservatism, having its detractors thinking it has made a U-turn and is now “quantity easing” might give it some welcome breathing space from political pressure.
Perhaps that’s part of the plan.
• Mnyanda is Business Day editor.
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