If the saying that good central banking should be boring has credence, then the Reserve Bank has been doing a great job lately. Few will have been surprised by its decision on Thursday to keep interest rates unchanged. Even the split vote, 3-2 in favour of keeping the repo rate at 3.5%, was widely expected.
I can’t be sure if former Bank of England governor Mervyn King was first to set “boringness” as a noble goal for a central bank. It was 20 years ago before he’d even got the top job, when he declared in a speech that “a successful central bank should be boring — rather like a referee whose success is judged by how little his or her decisions intrude into the game itself”.
This was a time when central banks, including SA’s, were moving towards inflation targeting and greater transparency. In his speech, King included an anecdote about joining the Bank of England (BOE) nine years earlier and being invited to a dinner that had among the guests Paul Volcker, the head of the US Federal Reserve at the time.
King said he asked Volcker, whose reign was associated with the US taming its inflation problem of the 1970s, what his advice would be for a new central banker. The reply, he said, was “mystique”.
Chris Stals might have given Tito Mboweni similar advice as he prepared to replace him as governor of the Bank in 1999. It’s definitely not the type of advice the current governor, Lesetja Kganyago, will be giving to any prospective successors. Those days of the markets being surprised by the whims of the governor have largely been set aside. Now central banks seek to set and communicate policy in a way that’s predictable.
About four years after King's speech, another member of the BOE’s monetary policy committee, Richard Lambert, stated that boring policymaking would “imply that the Bank had achieved its goals of low and stable inflation, and that it could always be trusted to do the right thing — the ultimate aim of monetary policy”.
Recently, with the economy in the midst of its worst crisis yet, I have found myself doubting that, though I’d be at a loss to find the answer to the question of whether good, stable and boring central banking is still fit for purpose. Where would the eurozone economy be, I wonder, if Mario Draghi, the Italian head of the European Central Bank, hadn’t defied the German inflation hawks in 2012 and did “whatever it takes” to save the euro?
Those three words have become such a catchphrase that in a briefing I attended recently, they were uttered by Kristalina Georgieva, the IMF’s MD. And she wasn’t even talking exclusively about central banks.
Explaining why she was a bit more optimistic about the global economy in 2021 — the organisation is due to release its latest outlook on Tuesday — she cited “decisive and sustained” monetary policy and fiscal measures in rich countries. Their leaders, she said, had raised their game to Draghi’s “whatever it takes” level. Like people today use “to google” as a verb, Draghi’s “whatever it takes” has created a new language around creative and courageous policymaking. Has our central bank lived up to the challenge? Has it done whatever it takes?
Kganyago will say yes. And there is no doubt it has done more than it usually does. The Bank has cut rates by a huge 300 basis points in the past year, so much so that he’s running negative interest rates taking into account future inflation. On top of relaxing regulations to promote lending by commercial banks, it also bought bonds to restore market stability, though the amounts were small relative to the size of the market and it always stresses that it wasn’t doing quantitative easing or seeking to influence yields. That they dropped was a happy coincidence, reflecting greater market confidence.
On the other hand, it’s not clear that much deeper cuts would achieve anything more than debase the currency and provide a temporary “sugar high” for markets and the economy. If a weak currency was a sure way to prosperity, then SA should be one of the richest countries in the world already. For some that will never be a convincing answer.
But the feeling that it should experiment and just see what happens still persists. The same approach applies to fiscal policy. Finance minister Mboweni’s critics argue that the government should forget about deficits and do whatever it takes — borrow more or get the central bank to print the money — and then it can deliver everything from a basic income grant to the National Health Insurance (NHI). That’s a world where policy trade-offs don’t exist.
It’s not much different from a football fan who knows more about tactics and team selection than the coach. They also have the same luxury of not being responsible for the consequences.
And let’s imagine that in 2012, instead of heading a currency zone that consists of 19 countries and includes Germany and France, he was running the Bank of Italy, and printing its own currency, the lira. The experiment most likely wouldn’t have been tried and likely would have ended badly. With no end in sight to SA's fiscal crisis, the potential of another run on the rand is obviously something that worries the monetary policy committee.
The good news is that the government might also be getting a bit more realistic. With all the attention on vaccines, a line in President Cyril Ramaphosa’s speech on Friday urging a rethink on whether the country can afford NHI might be a sign that the penny is beginning to drop.
If we get that right, Kganyago may well be able to keep getting away with being boring.
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