ANALYSIS | Are SA consumers in a deflationary danger zone?

"QE will become appropriate when interest rates are at the zero lower bound and there is deflation risk.

"While inflation has eased and created space for lower rates, I am not aware of any professional analyst who projects deflation in South Africa. Our own SARB forecasts are in line with this consensus," said Kganyago.

Price stability first

He added that if deflation were to manifest, then the bank would deploy the tools at its disposal, "as appropriate", while keeping to its mandate of price stability. "Our inflation-targeting framework would help us make that decision, and would underpin the credibility of any steps we might need to take," he said.

If the bank were to opt for QE by buying bonds on the secondary market, it would have the effect of investors shifting risk back to the public sector's balance sheet, at a higher price, he said.

"In other words, it would be a private sector bailout, arranged by the SARB. Worse, QE would reduce the incentives for new investors to come and buy long-term sovereign debt, because there would not be enough yield or compensation for the longer-term risks now visible."

Kganyago said that the bank has instead focused on providing liquidity by buying government bonds on the secondary market, at different maturities, in the response to the sudden stop in global capital flows, that followed as a result of the pandemic.

"As the central bank, we have unique powers to provide liquidity, and we have used them to restore market functioning. These interventions have been helpful so far," he said. Yields eased, even though the bank did not specifically target this.

"We are in very difficult circumstances, but QE isn't the answer. We need to focus on real solutions," he said.