Money and Markets

The Reserve Bank has now bought R20.9 billion in govt debt – but promises it isn’t guiding prices

Business Insider SA
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  • The SA Reserve Bank has bought R20.9 billion worth of government bonds in the secondary market, its annual report shows.
  • The purchase was one of the Bank's early responses to the coronavirus disaster, to help "buyers and sellers to agree on prices and ease liquidity concerns", it says.
  • The market initially read the move as quantitative easing – but it is not trying to influence price or yield, the SARB says.
  • Governor Lesetja Kganyago has offered a stark warning against SA trying to buy its way out of a Covid-19 slump with quantitative easing.
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The South African Reserve Bank (Sarb) has so far spent R20.9 billion buying government bonds, its annual report released this week shows – but it insists it is not trying to influence the price of government debt.

Up to the end of March, when its financial year ended, the bank had bought R1.4 billion in South African government bonds on the secondary market, its annual reports shows. Since then it has added another R19.5 billion in purchases.

Those purchases began after a disastrous auction for government bonds in March, with so little appetite for government bonds that analysts characterised it as a near failure

At the time, market watchers said that the SARB had effectively started implementing quantitative easing.

See also | Reserve Bank shocked into action: SA finally gets quantitative easing

But "the SARB is not purchasing bonds to influence the shape of the yield curve or the price of bonds," it reiterated, again, in its annual report. 

"The pandemic has resulted in sharp spikes in risk aversion in domestic and overseas financial markets. This has caused increased volatility in bond prices and constrained liquidity in the bond market, meaning that small transactions can have a big impact on bond prices.The objective of the SARB’s programme to purchase government bonds is to reduce excessive volatility, make it easier for buyers and sellers to agree on prices and ease liquidity concerns."

Even if, along the way, the purchases did seem to lower the yields on government bonds, effectively making it cheaper for the government to raise money.

The bonds are being held in a "Monetary Policy Portfolio", ready to be sold again should the bank believe it needs to do so for the sake of liquidity – so that small transactions can not move prices unduly.

Reserve Bank Governor Lesetja Kganyago has warned starkly of the dangers of trying to buy South Africa's way out of the Covid-19 slump through quantitative easing.

"Sometimes I think that if we just told people our asset purchases were QE, they might stop complaining that 'the SARB is conservative' - a criticism that has somehow survived despite surprise at how much the SARB has already done," Kganyago said in mid-June.

Full-blown quantitative easing could risk bankrupting the bank, leaving it dependent on National Treasury for a bailout, he said, meaning the end of its independence, with all the risks that carries.

See also | ‘This is wartime’: The Reserve Bank just freed up half a trillion rand as Covid-19 relief loans

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