Money and Markets

Reserve Bank shocked into action: SA finally gets quantitative easing

Business Insider SA
The South African Reserve Bank (SARB) cut the benc
File photo of Lesetja Kganyago. (Getty)
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  • After a disastrous South African government bond auction this week, the Reserve Bank has been shocked into action.
  • It created money out of thin air to buy bonds and other assets to keep markets moving.
  • This means South Africa has finally embraced quantitative easing.
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South African bond yields were two percentage points lower on Wednesday morning after the surprise intervention by the Reserve Bank which said it would buy an unspecified amount of government bonds. 

“We are adding liquidity to facilitate the functioning of the South African financial system,” SARB governor Lesetja Kganyago tweeted.

Market watchers interpreted the decision by the SARB as quantitative easing, where a central bank creates money out of thin air to buy government debt and other assets to help keep distressed markets liquid.

Anchor Capital’s Nolan Wapenaar says the move by the SARB is both unexpected and positive. He says the decision “is QE”. 

It follows the bond market becoming highly illiquid as the coronacrisis has played havoc with markets, with foreigners selling and locals showing little appetite to buy.

“The market was gummed up”, says Wapenaar. 

See also: Here's how much you'll save with the new rate cut – and how you can make it work harder

The SARB on March 20 announced a set of decisions to try and improve market liquidity, says Wapenaar, but that this had little effect. This was followed on Tuesday by a disastrous bond auction which “came pretty close to failure, no one was interested, there was no appetite”.  If government can't raise money through bonds, it will quickly be unable to fund state services in South Africa and pay civil servant salaries. 

Wapenaar says he thinks this shocked the SARB into action.  

Isaah Mhlanga, chief economist at Alexander Forbes, tweeted; “QE is a tool for extraordinary times and the SARB is responding to extraordinary times. Steady, pragmatic, responsible, responsive and caring institution. These are unusual times.” 

The Bureau for Economic Research’s Hugo Pienaar tweeted: “SARB to buy unspecified amount of government bonds in the secondary market, i.e. SA launches a QE programme. R186 government bond yield down 150bps from yesterday's close. Extraordinary times call for extraordinary measures. 

Blue Quadrant’ s Leandro Gastaldi tweeted: “Lets dampen the excitement over SARB "QE". It’s a move aimed primarily at stabilising the sovereign credit market and it will boost banking sector liquidity. But general risk aversion does not mean this will translate into broader liquidity to the private sector.” 

In the United States the coronacrisis has prompted the US Federal Reserve to promise to pump unlimited liquidity into the financial system, its balance sheet reaching $4,7-trillion yesterday and pundits saying it could rise to $7-trillion or beyond. 

Quantitative easing is typically used by central banks when policy rates reach zero. This by implication means that inflation expectations will also be at these levels. Kganyago is on record that for QE to be used inflation must be so low it threatens to go to zero and interest rates must be very low. 

In its most recent briefing after last week’s meeting of the SARB’s monetary policy committee the repo rate was cut by one percentage point from 6.25% to 5.25%. CPI was last measured at 4.6%. 

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