The Reserve Bank’s monetary policy committee (MPC) kept the policy repurchase rate unchanged at 6.75% at the conclusion of its meeting on Thursday. Its inflation forecast has slightly improved to 4.5%, 5.1% and 4.6% in 2019, 2020 and 2021 from previous forecasts of 4.8%, 5.3% and 4.7%, respectively. Core inflation has also improved to 4.5% and 4.8% in 2019 and 2020 from 4.8% and 4.9% at the last MPC meeting; the forecast for 2021 remained unchanged at 4.5%. The balance of risks is assessed to be balanced.
In addition to a slightly improved inflation outlook, the Bank has revised economic growth to 1% in 2019 from 1.3% previously due to the expected contraction in real economic growth in the first quarter, driven in part by Eskom’s loadshedding. Risks to the growth outlook remain on the downside.
Given this prognosis, leftist monetary policy pundits are of the view that the Bank missed an opportunity to cut rates to stimulate economic growth and job creation. They may be partially right about that, and they are supported by the shift in the voting split from a unanimous hold in rates at the March MPC to three members preferring to keep rates unchanged and two members preferring a 25 basis point cut. Moreover, the quarterly projection model now forecasts one 25 basis point cut by the end of the first quarter of 2020.
To further support the leftist stance, reasons cited include the fact that the US Federal Reserve, the European Central Bank and the Bank of Japan have all been using monetary policy to stimulate their economies through quantitative easing. Furthermore, they point out that in previous cycles the Bank cut rates from 21.85% in September 1998 to 11.75% in June 2000, then from 13.5% in March 2003 to 7% in June 2005 and from 12% to 5% in the aftermath of the 2008 financial crisis.
Even though the inflation prognosis is somewhat supportive of lower rates, the monetary pundits preferring cuts are wrong in their view that monetary policy can be used to solve the country’s growth problems, especially over the long term. The ideal that when growth is low the Bank can cut rates because we should be able to tolerate higher inflation, is somewhat misplaced because a large proportion of consumers who are unemployed cannot in truth tolerate high inflation.
Previous interest rate cuts were made in response to the 1998 Asian financial crisis, the 2000 dotcom bubble, and the 2008 global financial crisis. We are not in a crisis that needs short-term emergency stimulus, so we cannot advocate for the Bank to institute emergency interest rate cuts.
Moreover, citing advanced economies’ monetary policy stance as examples of what SA, a small, open emerging market, should follow, is devoid of any understanding of monetary policy. While advanced economies are fighting low inflation, emerging markets such as SA are fighting high inflation, reflected in above-target inflation expectations. Monetary policy stances cannot therefore be the same.
A learned panelist on one radio station lamented that the Bank should do more by financing low-cost housing and similar social developments. However, we have a number of development institutions whose mandates are to fund such social infrastructure, such as the Industrial Development Corporation, the National Empowerment Fund, the Development Bank of Southern Africa and the Land Bank. If the reasoning is that the Bank must take over these functions, this in effect means these institutions are failing to fulfill their mandates. In any case, this will make the measurement of the Bank’s successes impossibly difficult, because of the multiple functions outside conventional monetary policy.
What is surprising is the silence on the need to improve productivity in the productive sectors of the economy. Unfortunately, unsuspecting followers tend to agree with those who lump all the growth issues on the Bank and absolve all other institutions tasked with industrial policy of responsibility.
It is time that we move away from misplaced ideology and think and debate evidence-based policies. The re-establishment of an economic policy research unit in the presidency is a welcome development that will go a long way towards aligning government policy.
• Mhlanga is executive chief economist at Alexander Forbes.
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