Reserve Bank starts moves to free up more cash

It’s a funny business, not only business itself, which can be difficult at the best of times, but the business of printing money, a euphemism for freeing up liquidity for government during hard times.

And an old buzzword has been revived: quantitative easing.

While the practice of printing money exists, it’s generally not a good idea as it thins out the value of the currency and, like the Zim$100 trillion bank note, it becomes meaningless.

According to economicshelp.org, if more money is printed, consumers can demand more goods, but if firms still have the same amount of goods, they will respond by putting up prices.

“In a simplified model, printing money will just cause inflation,” it said.

America is doing it, with $500 billion (about R9.3 trillion) in government bond buys and $200 billion of mortgage bond buys.

England is doing it, to the value of £200 billion (about R4.7 trillion) in government and corporate bonds.

So why can’t SA do it? Well, it is and it isn’t, depending on who you talk to.

First, what is quantitative easing?

According to Investopedia, quantitative easing is a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market to increase the money supply and encourage lending and investment.

“Buying these securities adds new money to the economy and serves to lower interest rates by bidding up fixed-income securities. It also greatly expands the central bank’s balance sheet,” says Investopedia.

What the Reserve Bank (Sarb) is doing, is entering short-term funding markets, which will provide “additional liquidity in exchange for repurchase agreements for maturities of up to 12 months”.

Sarb continues: “This will assist with the continuous flow of funding to institutions over different time frames. In normal market conditions, such funding is readily available.

“The Sarb will also commence buying government bonds in what is called the secondary market.

“No, it is not quantitative easing. The Sarb is seeking to reduce dysfunctionality in the market rather than determining prices.

“Quantitative easing is generally applied where interest rates are zero or close to zero and inflation is far below the central bank’s target.”

Investec, however, announced the Sarb had gone into quantitative easing, “… a practice introduced by many leading central banks in the global financial crisis to buy bonds and other assets in the open market.

“Following the Sarb announcement, bond yields fell [yields and prices are inversely related] while the rand strengthened in response to the news, as well as to improved global market sentiment, following further market intervention by US Federal Reserve and the announcement of a $2 trillion rescue package,” Investec said.

– amandaw@citizen.co.za

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