Over the course of the year, the South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) slashed the key repo rate by 300 basis points, bringing it to 3.5% and the prime lending rate to 7.0%. The key rate is the lowest since it was introduced in 1998, giving many South African consumers, households and businesses access to relatively cheap money for the first time. The SARB was able to act boldly and decisively because inflation is muted and is currently near the bottom of its 3 to 6% target range. This is no surprise as demand pressures are clearly weak in an economy that contracted more than 50% in the second quarter of 2020. Still, the SARB’s moves, which included an emergency MPC meeting, signalled it was ready to use every tool at its disposal. Often regarded as a hawk when it comes to rates, Kganyago revealed an inner dove that could be unleashed if circumstances warranted.

The SARB also embarked on a bond buying programme in the secondary market to inject liquidity and stability into financial markets that were roiled by the pandemic and the shroud of uncertainty that enveloped markets in its wake. This was a variation on the “Quantitative Easing” (QE) that has been used in times of crises in advanced economies. According to the International Monetary Fund, the SARB was not alone on this front: 18 emerging market central banks took the plunge. And the measures generally worked, bringing stability to financial markets and lowering bond yields and hence the cost of borrowing.

And the SARB took this course of action without adopting far more populist policies often espoused by the Radical Economic Transformation (RET) crowd, which often displays a tenuous grasp of economics – and that is being charitable. Remember in 2019 when ANC Secretary-General Ace Magashule floated the idea of “quantity easing” and changing the SARB’s mandate to focus on growth? Indeed, in June of this year, Kganyago had a not-so-subtle message that was aimed at the RET rabble-rousers as well as the wider public in an online public lecture provocatively titled: “The South African Reserve Bank, the coronavirus shock, and ‘the age of magic money’.”

The bottom line was that South Africa had no magical sources of money and the SARB could not simply hit the printing press and churn out money. That is the last resort of basket cases such as the former bread basket north of the Limpopo.

Noting that proposals to boost the SARB’s bond-buying programme were “not modest”, the governor said: “The Constitution tells me the SARB must protect the value of the currency, and that we must have regular discussions with the finance minister. Nowhere does it say I can set conditions. As such, the SARB cannot take responsibility for solving a fiscal sustainability problem, nor can it jeopardise the value of the currency by agreeing to inflationary money printing.”

Indeed, the SARB’s mandate is “to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic”.

As the year winds down, the SARB’s interventions appear to be bearing fruit. As of early December, the rand was about 9% weaker against the dollar compared with the start of the year, but with this currency things could have been a lot worse.

Bond yields are back to the levels they fetched at the start of 2020, despite the descent of the country’s credit rating into the scrap heap of junk. Inflation remains under control and low interest rates should help support the recovery from the pandemic’s plunge without significantly igniting price pressures.

The SARB also had a mandate to maintain and enhance “financial stability”, and there has been no meltdown in the financial sector. As the central bank noted in its most recent Financial Stability Review: “The emergence of the coronavirus (Covid-19) pandemic has dramatically worsened the economic outlook and led to financial market dislocations in the first half of 2020. However, the financial system has continued to function effectively and financial markets have since stabilised. Notwithstanding the significant risks that the financial system currently faces, financial stability is expected to remain intact.”

Among other things the commercial banking sector remains well capitalised. There will be no VBS collapse on a grand scale.

The SARB, captained by Kganyago, has steered the ship of monetary policy through stormy seas this year without leaving a pile of wreckage on the shores. South Africans can be grateful for that. The bond-buying project appears to have accomplished its aims without recourse to “magic money”. Fiscal policy remains perhaps the biggest risk to the economy as debt levels soar, but monetary policy is in safe and independent hands. A former director-general in the National Treasury, Kganyago knows the financial worlds of the public and private sectors well. His articulate voice in these trying times has been heard above the din. South Africa’s economy, as fragile as it is and still scarred by grotesque levels of inequality, poverty and unemployment, would be in worse shape without his guiding hand on the monetary tiller. DM168