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The SA Reserve Bank (Sarb) says it is opposed to buying government bonds on a large scale during times of economic crisis because doing so would amount to bailing out investors who were paid generous yields to hold long-term debt, and have negative consequences for fiscal consolidation. 

Stimulus should instead be provided in the form of lower borrowing costs when warranted, the Bank said in a working paper published on its website on Monday.

The Bank acquired limited state debt in the secondary market following the onset of the Covid-19 pandemic in 2020 to ensure there was sufficient liquidity in the market. But it has repeatedly spurned suggestions from some investors, labour unionists and economists to follow nations from the US to the UK and embark on so-called quantitative easing (QE) to shore up an economy that experienced its steepest slump in at least 73 years as a result of the pandemic. 

“There are good reasons for the Sarb to avoid large-scale purchases of government debt, even if price stability is secure,” David Fowkes, a lead economist at the Bank, said in the paper. QE does not alter government budget constraints in a material way or alleviate the need for consolidation, he said. 

Key risks

The bank also warned that it risked becoming an enabler of artificially depressed rates should it aggressively intervene in the bond market.

Surging debt and debt-service costs, the fastest-growing expenditure line item in the budget since 2011, are key risks to fiscal sustainability. Debt is expected to peak at 75.1% of GDP in the 2025 fiscal year, according to the National Treasury. 

Fowkes said private sector bondholders were rewarded for buying long-term government debt before the pandemic and they should still be expected to bear the related risk rather than return it to the public sector through the central bank’s balance sheet. 

“If the Sarb commits to buying up government debt when prices fall, this could attract new investors by offering them a ‘heads you win, tails we lose’ trade’,” he said. 

Unlike in the US, whose key interest rate was at 1.5% to 1.75% when the pandemic struck, SA’s was at 6.5%, which gave the central bank room to cut borrowing costs by 300 basis points in 2020.

“Sarb’s Covid-19 strategy of cutting the repo rate to record lows and buying bonds only as needed to ensure market functioning appears to have achieved many of the benefits of QE without the risks,” the bank said in the paper. “It should therefore be interpreted as a superior strategy.”

Bloomberg News. More stories like this are available on bloomberg.com


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