It must be intensely frustrating to be the governor of the SA Reserve Bank. It remains the one steadfast pillar of institutional quality among the ruins of state capture, and yet there is a faction in the ANC that wants to pull it down.
Aside from politically motivated ANC hacks, who seek to use monetary policy as a trap in which to ensnare President Cyril Ramaphosa, there are many ordinary South Africans who just don’t understand how the Bank works.
They seem to think its job is to raise interest rates to cool the economy as soon as growth gets going because it operates in an inflation targeting straitjacket in which inflation must be kept between 3% and 6% at all costs.
Of course, the Bank’s job isn’t to choke off growth but to keep inflation low and stable because price stability is a necessary ingredient for a sustainable, growing economy. Price stability supports SA’s international trade competitiveness, provides certainty, improves planning and supports confidence — all of which are essential in driving economic activity.
Inflation has averaged just over 6% since inflation targeting was introduced in 2000 and, since the global financial crisis, so has the repo rate. The Bank’s average policy rate was about 13% in the 1980s and nearly 16% in the 1990s. So, South Africans can hardly complain about the success of inflation targeting. If anything, the policy was applied too flexibly after the global financial crisis, allowing inflation and inflation expectations to become anchored at 6%.
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Rather, it is SA’s disappointing economic performance over the past 10 years that is behind the clamour that the Bank’s inflation-fighting mandate be diluted to allow it to directly stimulate growth and employment — or for it to adopt “quantity easing” (sic), a naked attempt by some in the ANC to get the Bank to print money to eradicate state debt.
It’s strange that the Bank is being targeted for somehow failing to support the economy when it is the only state institution not directly responsible for stimulating growth. Growth has slowed because the rest of government has failed to do its job of removing the constraints that make it costly and inefficient to do business in SA. Ramaphosa has promised to attend urgently to things like spectrum allocation, high port, rail and energy charges, and delinquent state enterprises but has made little headway over the past 18 months.
The problem is that to undertake the structural reforms to get growth going requires politicians to make hard, unpopular choices — including retrenchments, asset sales and the privatisation and closure of some state-owned enterprises. Complex, technical decisions are also required over issues like the spectrum allocation and Eskom’s unbundling.
By contrast, the appeal of monetary policy where money can be created by fiat, or interest rates lowered at will, is obvious. But, by going this route, the ANC betrays the fact that it doesn’t understand what SA’s real economic problems are or how to fix them, or that it has no intention of making the hard choices required to do so.
And still commentators blame the Bank for being politically tone deaf for seeking to steer inflation towards 4.5%. ANC moderates complain that the Bank’s hawkishness makes it difficult for them to quash calls from more populist comrades to change the Bank’s mandate.
But you can’t have lower interest rates without lower inflation. And lower is exactly where inflation expectations have been heading since the Bank began to shift towards a 4.5% target. The weak economy has enabled it to affect this transition with less disruption than would have been possible in an environment of rapid growth. So maybe its timing hasn’t been so imperfect after all.
In any case, SA should be glad to have a Bank that is deaf to political noise. Its job is to listen to the economy and act appropriately without fearing fire-breathing politicians who can’t even spell “quantitative easing”, let alone understand what it means.
• Bisseker is a Financial Mail assistant editor.
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