The central banks are back in focus this week, and the SA Reserve Bank is not the one I will be looking at most closely.
There’s been a lull in interest in our central bank since the early days of the Covid-19 pandemic when the governor, Lesetja Kganyago, was on the air almost every day defending its actions, which were not enough for some, clamouring for more unconventional policy in tune with the economic crisis.
That may not be gone completely given that the economic data gets more grim by the day, showing the lasting impact of the lockdown that started late in March. Unemployment data last week showed that many of the job losses suffered during the lockdown are likely to be permanent.
Whether the actual number of jobs lost is 1.4-million or 1.6-million, what is beyond debate is that it’s a catastrophic state of affairs for a country that had record unemployment even before the Covid-19 outbreak. The Reserve Bank argued that it had done its part, cutting the repo rate to the lowest in about half a century, while undertaking other measures to support liquidity and lending in the banking sector.
It was still compared unfavourably to others that went further with unconventional policies such as quantitative easing, though this has long been “conventional” in developed markets, and printing new money to fund exploding government borrowing, as did the Bank of England.
The debates about following this policy path centred on the costs to the country, the possibility of an even bigger run on the currency that then leads to an inflation spiral that requires an even more aggressive and damaging policy tightening than would have been needed otherwise.
Pushing back against the proponents of “magic money”, Kganyago argued that the Bank was able to deliver record-low interest rates at the time of crisis precisely because its conventional policy had tamed inflation.
“We have achieved low inflation,” he said at a lecture at Wits in June. “We cannot squander that achievement on the quixotic belief that if we just engineer higher inflation, somehow growth will permanently rise,” repeating the mantra, which now seems to be universally accepted, in government anyway, that structural reforms in the wider economy were more crucial for long-term wealth creation.
For those advocating a different approach, Turkey was, surprisingly not top of the list of examples to be followed. Even before the Covid-19 outbreak, President Recep Tayyip Erdogan had taken control of economic policy-making and in 2019 fired the then central bank governor Murat Cetinkaya who had refused to cut interest rates.
According to Erdogan, central banks could promote slower inflation by cutting interest rates. The replacement Murat Uysal largely did the president’s bidding and lost market credibility as he cut interest rates despite a plunging currency and faster inflation. He increased rates in September, but that proved too little to stabilise the currency and he was in turn fired earlier in November, replaced by a former finance minister, who has promised a return to orthodoxy, with the apparent blessing of Erdogan.
The experimentation has come at a great cost for the Turkish people. The inflation rate is running at almost 12%, compared with SA’s latest reading of 3%, the lower end of the 3%-6% target range. The lira has been among the worst performing emerging market currencies against the dollar. It’s down about 23% in 2020, and even that’s flattered by an 11% gain last week, which came after the policy concessions announced by Erdogan. In contrast, the rand, which was approaching R20/$ in April, has reduced its 2020 drop to less than 10%.
According to a report on Bloomberg, other efforts to support the currency, such as the sale of dollars by the country’s banks, led to net foreign-exchange reserves falling by more than half. And then there are Thursday’s rates decisions. While the Reserve Bank’s meeting is expected to be an uneventful event with the repo rate, which has been cut by three percentage points in 2020, likely to stay at 3.5%, a Bloomberg survey of economists sees a 4.75 percentage points increase to 15% in Turkey.
None of this means the Reserve Bank, assuming it keeps interest rates on hold, will not attract a fair amount of criticism, especially if forecasts for GDP are revised even lower than the projections of an 8.2% contraction in 2020, followed by growth of 3.9% and 2.6% in the following two years.
There is likely to be even more controversy in 2021, if it raises interest rates at a time when the economy is weak and unemployment is rising further into record levels, or at least not dropping. That’s more likely than not. As the Turkish example shows, emerging markets such as SA with fragile and volatile currencies can hardly afford to have negative real interest rates.
Kganyago will at least be able to point to Turkey, and its spectacular climbdown, as evidence of what happens when populist policymaking tries to rewrite the rules of economics.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.