It is now clear that the Covid-19 outbreak will produce the worst economic downturn in a century, with output expected to contract by about 7% in 2020. The SA Reserve Bank has responded flexibly, quickly and aggressively to this crisis. Our five most important measures have been as follows:
We have provided regulatory relief to the financial sector to help maintain the flow of credit in the economy despite the temporary payment problems for firms and households caused by the Covid-19 shock. These actions have improved market functioning, and are supporting economic activity. The outlook remains highly uncertain, however, so we are watching the data closely and are ready to act as appropriate to uphold our mandate. In doing so we are guided by a few important considerations.
Any decision to move along the spectrum needs to be embedded in our inflation-targeting framework. Getting the inflation forecast right gives us credibility to shift along the bond-buying policy spectrum without tipping into higher inflation. Judging by the recent moderation in long-term rates and lower inflation levels, it appears we have got the overall policy effort about right for the moment.
As many economists have pointed out, sustainability concerns have to be addressed at a fiscal level. This means the debt-to-GDP ratio has to stabilise, and those projections need to be realistic. If debt sustainability can be assured, with high probability, then near-term borrowing will be more readily available. In these circumstances, were government still to experience financing disruptions we could feel confident that these were liquidity problems that the Reserve Bank could help address.
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