EDITORIAL: Busy times for the Reserve Bank
For the first time in about 18 years, the Bank convenes an unscheduled policy meeting
The Reserve Bank, which often comes under attack for its alleged conservatism, has been rather active lately. Just three weeks after cutting interest rates by a bigger margin than economists expected and following that with a range of liquidity-boosting measures, it has done it again. For the first time in about 18 years, it convened an unscheduled policy meeting.
Citing the unprecedented economic disruption caused by the Covid-19 outbreak and the resultant moderation in the inflation outlook, the monetary policy committee (MPC) delivered a one percentage point cut in the repo rate, adding to a similar reduction just three weeks ago.
When it took such a step in 2002, the move was to raise, rather than cut, in the midst of one of the periods of currency turbulence that the country falls victim to once in a while. In case there was any doubt, this time it really is different.
The cut came despite the Bank noting that the rand has dropped about 22% since January against the dollar while foreign investors have sold about R100bn in local assets. In more "normal" times, one would expect the Bank to hike rates in an attempt to discourage further outflows and prevent currency weakness from fuelling inflation.
As the IMF noted, this crisis is different to anything the world has seen before, with "severe uncertainty" about the duration and intensity of the shock. The starting point is grim enough, with global GDP expected to shrink 3%. To think that just three months ago, it was expecting an expansion of just more than 3%. The IMF expects SA’s economy to shrink 5.8% in 2020; it is slightly less pessimistic than the Bank, which sees a 6.1% drop.
As bad as they are, the numbers don’t do justice to the hardship that awaits homes and businesses across the country.
In as far as it provides any relief and will allow commercial banks to do the same and lower the cost of money for their customers, the rate-cut step by the Bank is a positive one for an economy on its knees. While the question can be asked what use cheaper money will be for businesses when consumers are unable to spend due to the five-week lockdown, which may well be extended, anyone who has borrowed to buy a house or a car will get some breathing space.
The Bank’s actions won’t necessarily close the debate about whether it can, or should, do more. There will still be calls for it to be more aggressive in its market interventions.
While the Bank is buying bonds in the open market, deputy governor Fundi Tshazibana reiterated that this is not aimed at reducing the government’s cost of borrowing but at smoothing liquidity conditions so that sellers can find buyers. The fact that the 10-year yield is down about two percentage points since the Bank started to get involved is probably a welcome outcome for the government, but was not the Bank’s intention.
In the statement read on behalf of the MPC, Bank governor Lesetja Kganyago took the standard stance that monetary policy "cannot on its own improve the potential growth rate of the economy or reduce fiscal risks" and that these should be tackled "by implementing prudent macroeconomic policies and structural reforms".
That leaves the ball in the government’s court. The central bank has so far been proactive and has shown a willingness to respond to the changing circumstances. However, there is some doubt about the Treasury’s resolve and the government has left itself open to the accusation that it is not acting with the urgency required by the situation.
Given the nature of the shock and the impact on its assumptions about economic performance, tax collection and therefore its deficit, the Treasury cannot carry on in the belief that this can be dealt with simply by reallocating spending priorities.
Sooner rather than later, it needs to come back to the country with a new budget to show how it plans to cope with our new and frightening reality.
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