South Africa: Lecture by Lesetja Kganyago, Governor of the South African Reserve Bank, at the Wits School of Governance in Johannesburg
The South African Reserve Bank, the coronavirus shock, and ‘the age of magic money’
It is now clear that the COVID-19 outbreak will produce the worst economic downturn in a century. We expect that ‘the great lockdown’ will cause the output to contract by about 7% this year. The last time a figure of that magnitude appears in our data is 1931, during the Great Depression when output fell by 6.2%. It had declined by 6.1% in 1930.
The South African Reserve Bank (SARB) has responded flexibly, quickly and aggressively to this crisis. So far, these actions have improved market functioning, and are supporting economic activity. However, the larger economic outlook remains uncertain. We are watching the data closely, and we are ready to act as appropriate, in accordance with our mandate.
Fortunately, central bank governors tend to get a lot of advice, and I have been particularly well-supplied with suggestions for SARB policy recently. Allow me to add to the national public debate today.
I will cover four main points.
First, the bond-buying programmes fall on a spectrum, running from limited to larger interventions. Conducting any of them successfully is made possible by our inflation-targeting framework and the flexible approach we take to it.
Second, the scale of asset buying we do should follow from a clear sense of why markets have been malfunctioning. I’ll distinguish between liquidity and sustainability problems. Central banks can provide liquidity, while challenges like fiscal sustainability are best dealt with elsewhere.
Third, we need more clarity around the mechanics of central bank asset purchases, quantitative easing (QE), and the ‘zero lower-bound’. These concepts are pretty hard to understand. It is easy, for example, to take the mistaken view that QE is ‘free money’.
Finally, I will reflect on the utility of inflation targeting for addressing the current economic conditions and potential depression-type conditions. The intellectual heritage of inflation targeting traces back to the study of the Great Depression, so we can say that depression-fighting is ‘in its genes’.