Financial consultant Intellidex has commended the South African Reserve Bank’s (SARB’s) move to begin longer-term repo operations from March 25 and to buy South African Government Bonds (SAGBs) in the secondary market.
According to the consultancy, “this is a major, very much necessary crossing of the rubicon" by the SARB in response to the breakdown of local liquidity conditions and the dysfunction in recent days in the bond market.
While this is considered to be a form of quantitative easing, Intellidex noted on March 25 that “further steps will be necessary” to move to the bank regulatory side more now.
Following the bank’s liquidity measures, announced on March 20, which Intellidex described as “being incentive and optionality based for banks only”, the consultancy believes “more was clearly needed” and the SARB has, through its most recent move, exceeded expectations.
The offered rate cut reduction, but not liquidity, means that last week’s measures “allowed banks more liquidity optionality at lower penalty rates on the standing facility and more regular access to repo”, but Intellidex believes that “liquidity forcing” was needed.
Banks can now achieve through one of the two following ways:
First, refinancing operations will be offered out at the twice daily windows. This, according to Intellidex, forces liquidity and price anchoring further out the front end of the curve.
However, while the SARB says this does not imply future monetary policy actions, it does “fix in the curve” the idea of lower for longer.
“We suspect longer tenors will be higher spreads but overall they are likely to be a flatter profile than the market curve. This will have to be monitored. Overall this kind of move ensures better front end monetary policy transmission, such as if future rate cuts are forthcoming,” a statement issued on March 25 indicates.
Secondly, the SARB will expand its “monetary policy portfolio” to include purchasing SAGBs, which Intellidex said would direct cash into the secondary market and add a backstop bid to the market where there has been none in recent days, according to the consultancy.
This is a programme announcement, it added, and gives the SARB the option.
“We think they will indeed be doing this in the coming days and weeks but the expansion of the tool kit is the announcement, not a firm commitment they are doing it.”
Overall, Intellidex views this move as a “monetary policy move and an easing of monetary conditions”, explaining that, when such things happen further out the curve they can have an uncertain impact but the mix of forcing and mindset change are important in and of themselves as a policy tool.
However, on the other hand, the consultancy noted that the SARB wanted to anchor this as a liquidity operation, and said the political implications would potentially become complicated.
“The SARB may well be attacked for why it hasn’t done this in the past to help a stimulus and improve poverty alleviation.”