Photo: GCIS

Thebe Mabanga

The South African Reserve Bank is set to embark on an unprecedented purchase of government bonds in a bid to boost liquidity in the wake of the coronavirus pandemic.

This comes less than a week after Reserve Bank Governor Lesetja Kganyago said the bank saw no need to take extraordinary measures to mitigate the effects of the pandemic.

The bank denies that the move is Quantitative Easing, or QE, defined as the act of purchasing bonds to boost liquidity practiced by the United States and European Central Banks in the wake of the 2008 Global Financial Crisis.

A statement released by the bank on Wednesday announced: “Further amendments to the money market liquidity management strategy” and “additions to the Monetary Policy Portfolio”.

The amendments are in addition to measures announced on the 20th of March, which comprise additional daily and a new weekly auction for repurchasing by commercial banks.

In an unprecedented move, the bank announced: “As a further measure to add liquidity to the market, the SARB will commence a programme of purchasing government securities in the secondary market.”

The bank said purchases will be conducted “across the yield curve,” which means all government bonds with terms of maturity ranging from 1 to 10 years will be purchased.

“In addition to providing liquidity and promoting the smooth functioning of domestic financial markets, this will allow the SARB to enhance its Monetary Policy Portfolio (MPP).” 

The Bank says the MPP is one of the instruments in its toolkit for managing money market liquidity and can be used to add or drain liquidity from the market.

Kganyago never mentioned this at the MPC Press Conference.

Samantha Springfield, acting senior manager: Market Intelligence and Operations at the Reserve Bank, confirmed that the bank has never purchased bonds in the secondary market, or for building the MPP, and was last active as primary seller in the 1990s.

“We have not indicated an amount of purchases as this will be at the discretion of the SARB,” said Springfiled.

Finance Minister Tito Mboweni denied South Africa was embarking on Quantitative Easing.

“Government sets the mandate of SARB. There is no quantitative easing thing here. The primary mandate of the SA Reserve Bank is to protect the value of the currency in the interest of balanced economic growth and development,” Mboweni said in a tweet.

Springfield says that “QE is generally applied as a tool where interest rates are zero or close to zero and inflation is far below the central bank’s target or even threatening to turn negative”.

She says QE has been used to purchase a range of assets to support growth and investment and raise inflation.

“The SARB is not seeking to do this and South Africa does not have interest rates at or close to zero” says Springfield, pointing out that the aim is to merely ensure the smooth functioning of markets.

Last week, the bank cut the repo rate by 100-basis to support the economy through the Covid 19 crisis. 


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