Central banks must be careful not to get sucked into fiscal policy – Kganyago

The economic meltdown caused by the coronavirus pandemic and the market uncertainty it unleashed since the end of February has seen the world’s leading central banks, including the South African Reserve Bank, come under pressure to bail out their respective economies in the form of interest rate cuts. They’ve been urged to fund governments, an idea that central bank governor, Lesetja Kganyago, says is tantamount to a client instructing their banker to do the same.

“When you hear government saying that the Reserve Bank should be funding us or something like that, we say: ‘That is very interesting.’ It’s tantamount to a client saying to their banker: ‘I instruct you to fund me,” Kganyago said during a virtual panel discussion hosted by Investec on Wednesday.

“Banking does not work that way, the world does not work that way and the authors of our Constitution were very conscious of this when they segregated the responsibility between the fiscal and the monetary authority,” he said.

Over the weekend, Deputy Finance Minister David Masondo shared views that the central bank could do more. During a panel discussion hosted by the ruling party ANC, Masondo commented that he would support a decision by the Reserve Bank to purchase government bonds directly from Treasury. This would have to be with the intent to fund Covid-19 health interventions as well as support structural reforms to ensure long term growth of the economy. 

Masondo issued a statement to Fin24 on Sunday, wherein he clarified that the Reserve Bank’s decisions are to be “independent” and without “undue pressure”.

Kganyago would not comment on Masondo’s remarks or fiscal policy, but said that there is a debate among the central bank community on the extent of the bond purchases central banks are making and the extent to which it could suck central banks into fiscal policy decisions. He said these “quasi fiscal measures” could be problematic. 

In South Africa, the legislation limits how much government debt the Reserve Bank can be purchased in the primary market, he said. Secondly, South Africa – as a member of the Southern African Development Community – is limited in providing more than 10{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of funding to government. “It is an international treaty that South Africa adheres to,” Kganyago said. 

The Reserve Bank has instituted a number of measures to help support the SA economy, during a nationwide lockdown which saw economic activity grind to a halt. This includes lowering interest rates by 200 basis points and buying government bonds from the secondary market, Fin24 previously reported. Bond purchases are a monetary policy instrument, and the Reserve Bank has full operational independence in this regard. 

Kganyago said the Reserve Bank embarks on its bond purchase programme when it detects dysfunction in the market. “We understand that a functioning bond market is important for the government, but more importantly for us as a central bank. Our own monetary operations and our own collateral system functions through the bond market and if we see that the bond market becomes dysfunctional then you know that there is a threat that monetary policy itself might not be as efficient,” he said.

Investec chief investment strategist Chris Holdsworth, who was on the call with the governor, said the bank’s bond purchases have been helpful in preventing the dislocation seen in other markets around the world. Investec is of the view that inflation is under control and will be over the medium term. Both these factors make South African bond attractive, he said. 

The Reserve Bank projects inflation to be 3.6{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} or lower this year. Kganyago commented that when the currency depreciates, it creates an upside risk to inflation, but the oil price collapse has countered the effect of the depreciating currency. “In spite of the some 25{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} depreciation in the currency the decline in the oil price more than compensated for that –  it kept inflation in check,” Kganyago said.

Kganyago said it is important to restart the economy, but it won’t look the same. In a world where social distancing will become normal, it is important to take advantage of opportunities in e-commerce. For this reason, the release of spectrum is critical. “We are going to have to release spectrum because if we even as we restart this economy, we are to maintain social distancing we are going to have to take advantages of what e-commerce offers in this environment,” he said.

He added that other structural reforms, such as improving education and securing energy, will also need to be implemented to lift growth. From the Reserve Bank’s position, Kganyago said it would use its tools as appropriate and within the bank’s mandate to support the economy.

Kganyago commented that the pandemic had probably helped reset the relationship between the public and private sector, something which might have taken months or years to happen. The combined fiscal and monetary package is R800. Treasury, working along with the banking industry set up a R200 billion loan guarantee scheme allowing banks to extend Covid-19 loans to small companies. The Reserve Bank in turn has extended support to the banking sector through its repo facilities. Kganyago described it as a “true public-private partnership”. 

“The virus has achieved exactly that, it has forced us to work together. We have suddenly realised that none of us have horns, that we are all human and that if we put our effort and our thinking together we are able to work at one,” said Kganyago.

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