Fundi Tshazibana: The interest rate cycle during and after the COVID-19 pandemic

Keynote address by Ms Fundi Tshazibana, Deputy Governor of the South African Reserve Bank, at the virtual Absa Annual Fixed Income Conference, 7 October 2020.

The views expressed in this speech are those of the speaker and not the view of the BIS.

1. Introduction

Ladies and gentlemen, thank you very much for allowing me the opportunity to deliver the keynote address at your Fixed Income Conference. While, sadly, I do not have the pleasure of standing in front of you today − the COVID-19 pandemic is not allowing it this year − I am nonetheless confident that this conference will stimulate pertinent and challenging discussions. The pandemic has changed many aspects of our life in 2020, and interest rate setting is one of them. The rate decisions taken by both the South African Reserve Bank (SARB) and its global counterparts in the past nine months are set in broad macroeconomic trends that have been in place for years, and which have made this speedy and sizable reaction to the COVID-19 pandemic possible. Now, will these trends remain in place in the coming years? Will the pandemic exacerbate them or, on the contrary, will it usher in structural changes that call for a different calibration of monetary policy in the future? These are some of the issues I will attempt to address today.

2. A long trend towards lower interest rates

The start of the long-term downtrend in global interest rates can be traced back to the early 1980s, in the wake of the United States (US) Federal Reserve's (Fed) decision to tighten policy sufficiently to uproot what was, at the time, seen as structurally high inflation. As US inflation started its long decline, so did interest rates: from averaging 10.0% in the 1980s, the federal funds rate declined to 2 averages of 5.1% in the 1990s and 2.9% in the 2000s. As other countries, first in the developed and then increasingly in the emerging world, followed the US example and made price stabilisation a priority, a global trend towards lower interest rates set in. The Reserve Bank of New Zealand was a pioneer in the field of inflation targeting in 1990; 20 years later, the majority of advanced and large emerging economies had a similar framework in place. This not only allowed for lower average inflation around the world, but also for lower dispersion of inflation rates across countries. Global drivers of inflation gradually gained in importance at the expense of domestic factors, allowing for a broader international diffusion of major economies' disinflationary trends.1