Not so easy: why quantitative easing is inappropriate for South Africa
Last Modified Date:
2022-03-28, 10:50 AM
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South Africa is an emerging market with robust monetary policy credibility but difficult fiscal dynamics. It might therefore seem like a reasonable candidate for quantitative easing (QE), especially given the use of this tool by several emerging market peers following the onset of the COVID-19 pandemic. However, there are good reasons for the SARB to avoid large-scale purchases of government debt, even if price stability is secure. First, it would risk creating moral hazard, diluting the incentive for fiscal consolidation without removing the need to consolidate. Second, QE would transfer risk to the central bank’s balance sheet while bailing out investors who were paid generous yields to hold long-term debt. Taking this risk back onto the consolidated public-sector balance sheet would undermine the fiscal authority’s prudent pre-COVID- 19 debt management strategy of issuing mostly long-term debt. Third, government is already able to replicate the QE effect of lower borrowing costs by issuing more short-term debt, a tactic National Treasury used successfully during 2020. While QE is a valid monetary policy tool for central banks constrained by the zero lower bound, it is less effective than the standard interest rate tool. As the zero lower bound is not binding in South Africa, it is unnecessary and inappropriate to adopt this inferior instrument.