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South African Reserve Bank Governor against easing quantitative restrictions

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(5minutes read)

· The SA Reserve Bank Governor Lesetja Kganyago warned that the rolling out a full-blown quantitative easing program could risk
bankrupting the institution, making it dependent on the National Treasury every time, in case of a bailout.

· Listing out several monetary measures deployed by the apex bank to address the impact of the coronavirus pandemic tools to
assist the indebted consumers and businesses, such as lowering the repo rate by a total 275 basis points, relaxing rules to allow
commercial banks to lend more and purchasing over R20 billion worth of government bonds on the secondary market to counteract “dysfunction”, the governor said that it would show results and would enhance liquidity in the system.

· The governor’s conservative approach has invited a fair share of criticism from a few quarters including the ruling party ANC.

The SA Reserve Bank Governor Lesetja Kganyago warned that the rolling out a full-blown quantitative easing program could risk bankrupting
the institution, making it dependent on the National Treasury every time, in case of a bailout. The central bank governor was giving a
virtual lecture hosted by Wits University on the role of the central bank in responding to the impact of Covid-19.

Listing out several monetary measures deployed by the apex bank to address the impact of the coronavirus pandemic tools to assist the
indebted consumers and businesses, such as lowering the repo rate by a total 275 basis points, relaxing rules to allow commercial banks to lend more and purchasing over R20 billion worth of government bonds on the secondary market to counteract “dysfunction”, the governor said that it would show results and would enhance liquidity in the system.

The governor’s conservative approach has invited a fair share of criticism from a few quarters including the ruling party ANC. They say
that there should be quantitative easing ( QE), which is a process of introducing new money into the system. Normally, the central bank
resort to buying bonds from the market to beef up the liquidity in the system. That also is a way of monetizing the deficit, without
resorting to printing of currencies.

The apex bank governor, however, said that what the South African economy is facing does not necessarily warrant “full-blown” QE since
it would increase debt to unsustainable levels. It may be noted that Deputy Finance Minister David Masondo previously said he is not
opposed to the Reserve Bank buying government bonds directly from Treasury\.

A section of the economists and bankers are for the Reserve Bank to help finance R1 trillion in stimulus spending or to buy between R10 billion to R20 billion worth of bonds per week to finance economic recovery. The governor, however, has a different take. He feels that
such interventions would crowd pension funds and other institutional investors out of the bond market. He added that this would send out
wrong signals about its monetary policy. Also, the central bank will not be able to protect the value of the currency, as mandated by the Constitution. A large QE program can be inflationary and costly to the Reserve Bank. It could render the bank insolvent within a year, Kganyago said, adding that once a central bank approaches a Treasury for a bailout, that is the end of the independence of the central bank,” he stressed.

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