South African Central Bank Shuns Calls for Broader Mandate

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Lesetja Kganyago

Photographer: Jason Alden/Bloomberg

Photographer: Jason Alden/Bloomberg

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South African Reserve Bank Governor Lesetja Kganyago dismissed suggestions the central banks inflation-targeting mandate be broadened and that it undertake quantitative easing to support an economy facing its deepest contraction in almost nine decades.

Calls for the banks mandate to be changed to include economic growth and employment, and for it to implement aggressive quantitative easing to bankroll the state resurfaced as the coronavirus pandemic and lockdown restrictions battered the economy and government finances. Neither of these proposals would make sense, Kganyago said on a webinar organized by the University of Pretoria on Wednesday.

“Given all the challenges facing South Africa, we should recognize that monetary policy is the last place where we should consider risky changes,” he said. “We have a well-established inflation-targeting framework, which is delivering low interest rates and low inflation. This is the most functional part of the macroeconomic framework.”

The constitution requires the central bank to “protect the value of the currency in the interest of balanced and sustainable economic growth.” While it targets inflation in a band of 3% to 6% in line with this mandate, it has no explicit growth target.

“Formally adding an extra mandate, in the context of our propensity to stagflation, could encourage policy mistakes and weaken credibility,” Kganyago said.

No Deflation

Muted price growth has allowed the central bank to lower the benchmark interest rate by 300 basis points this year to help prop up the economy. While inflation was below 3% in May and June, the central bank doesnt see a risk of a negative rate, or deflation, which means quantitative easing is also not an option.

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“Quantitative easing will become appropriate when interest rates are at the zero lower bound and there is deflation risk,” Kganyago said. “While inflation has eased and created space for lower rates, I am not aware of any professional analyst who projects deflation in South Africa.”

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The central bank has been buying government bonds in the secondary market since March and insists its aimed at reducing market dysfunction and is not quantitative easing. It held 38.3 billion rand ($2.2 billion) in government securities at the end of July.

Quantitative easing would allow investors to shift risk to the public balance sheet at a higher price, effectively leading to a bailout for the private sector arranged by the central bank, Kganyago said. It would also discourage new investors from buying long-term government debt because there wont be enough yield or compensation for the longer-term risks, he said.

(Updates with central bank bond holdings in penultimate paragraph)