Dr Rashad Cassim, deputy governor of the South African Reserve Bank (SARB), says that the central bank has learnt a number of lessons from the Covid-19 pandemic and what it will mean for monetary policy in the country.
Speaking at an HSBC conference at the end of November, Cassim said that many central banks, particularly in advanced economies, had to largely resort to quantitative easing (QE) with ‘speed and vigour’ to stimulate their economies.
“At this stage, we are able to rely on conventional monetary policy, which implies that we still have room to provide further accommodation before having to consider QE-type measures, should economic conditions deteriorate and inflation moderate further down towards the lower end of the inflation target,” he said.
Cassim said that the SARB, like many central banks that are not at the zero lower-bound of their policy interest rates, used its balance sheet not to stimulate the economy, but as a crisis management tool, in line with its financial stability mandate.
“We will continue to use these tools in the future in the same spirit if need be,” he said.
He added that unlike the great financial crisis in 2008 where inflation was high, and which required interest rate hikes even as the crisis was unfolding, South Africa entered the Covid-19 crisis with stable and low inflation rates, and moderate inflation expectations.
“This allowed us room to respond to the crisis quickly with significant interest rate cuts. Despite our cuts, inflation still seems to be moderating further below the midpoint of the target.
“Needless to say, the most important post-Covid challenge is that when the economy starts recovering and inflation begins to drift upwards, we have to make sure that we are able to find the right balance in our monetary stance that, at one level, would not result in a premature tightening of monetary policy while also guarding against a delayed response that would reverse a sustained downward trend in inflation expectations.”
Cassim said that several views are emerging globally that may be of relevance to South Africa.
“The nature of the pandemic is expected to bring about various changes to the economy, including much slower capital accumulation than in the past and a change in tastes and preferences that will lead to reallocation effects in the economy.
“Some argue that, given the nature of the crisis, some capital will become obsolete very quickly and this has significant implications for the long-term productivity of the economy.”
Expectations of the potential long-term impact of the Covid-19 crisis on economic growth, along with rising levels of public debt, are also particularly concerning for a country such as South Africa, given its large dependence on external financing as a result of our structural current account deficit, said Cassim.
These unfavourable growth/debt dynamics could result in a change in global investor sentiment towards South Africa, even as investors turn towards riskier assets such as emerging markets in search of higher returns, he said.
“This may, in turn, affect capital flows to South Africa and/or increase the risk premium investors require, particularly given that they already held an overweightinvestment position in South Africa going into the crisis.
“A key consideration in this regard is whether we will see investor differentiation between emerging markets, with preference for those with strong growth and fiscal metrics.”