I want to place in the public domain something I have opposed over several decades: predictions about the social world. I will not invoke Walt Whitman’s apology for self-contradiction, and instead hide behind John Maynard Keynes’s “hunch”.
More recently, Christian Madsbjerg wrote in Sensemaking: The Power of the Humanities in the Age of the Algorithm that the success that gave George Soros his fortune included “investigation, conceptualisation, and strategising [but] started with a hunch”.
And so, having presented the excusatio non-petita accusatio manifesta (an excuse not asked is a clear accusation) I have a hunch, and want to suggest that 2023 will be the year of the central bank. Not necessarily the SA Reserve Bank, but central banks in general.
I want to suggest that there needs to be greater co-operation among central banks, without assuming there is some kind of harmony of interests between Wall Street and Nepal, for instance.
We can start with a standard, reliable set of points about central banks, especially on the issue of inflation, which does include our Bank. Not that I know everything that is going on at the highest level of the institution.
From what I have learnt, the key debate, which can probably be generalised, is as follows: some think inflation will fall rapidly, mainly because of base effects, falling energy prices, weakening economies and the effect of rising interest rates. On the back of this, there is a belief that little or nothing more should be done, as more would cause unnecessary economic pain.
Another view is that inflation may fall, but could remain sticky at around 4%, leaving central banks with a difficult choice; to hike more when the economy is weak, or tolerate higher inflation, which could result in negative effects on bond yields and inflation expectations. One of the main concerns about central banks in the latter scenario is that they would have to do more than they would have done otherwise.
There is a real concern that too much tightening could further damage an already weak global political economy. One important issue amid all this is the lags of policy — any policy decision made today will only come into effect in 12 or even 18 months. It is also important to keep a close watch on the dollar and the state of the US labour market. Let that remain part of the basis of any effort.
Never mind the “deglobalists” and terribly misguided talk of “decoupling” (ask North Korea). There is no getting away from the reality of a functionally integrated global political economy, and what we have come to understand as the structure of global finance.
Greater co-operation
At this global level, perhaps as a response to the fallout from the coronavirus, war in Ukraine and its effect on a putative European energy crisis, rising inflation in most of the industrialised world and general uncertainty — the uncertainty invoked by Keynes in the 1920s and 1930s — we should encourage greater co-operation among central bankers.
Such co-operation will inevitably have to start with the questions first asked by the Bank of International Settlements in the mid-1930s: co-operation on what? With what objectives in mind, and how?
We need to accept (or reject) some initial objectives; that monetary and financial stability, both conceptually and operationally are probably the primary, and most important, functions of central banks. However, as with low inflation or growth, these cannot be ends in themselves. They are always a means to an end, and those ends have to be social and include all sectors of society, especially business, labour, state and society.
You can have all the growth, low inflation and financial stability in the world but it is meaningless if unemployment, inequality, homelessness, food scarcity and communal violence persist. At the level of perception only that would appear to stretch the mandate of the central bank, but these institutions do not work in isolation. Other institutions and agencies have to do their part.
The Bank of International Settlements noted a “public good” function of central banks that would “parallel the activities of governments more generally in actively shaping institutional arrangements and resource allocation within the economy for developmental objectives”.
Interventions by central banks can “guide and promote specific developments ... beyond an investment in the arrangements that would help to increase the effectiveness of their core functions”.
With good cause, at the start of 2023 central bankers are torn between the twin fears of deflation and inflation. Instead of waiting to see what happens next, a more deliberative set of interventions aimed at more progressive social outcomes might be useful.
It remains wise to bear in mind the lags of policy, to keep an eye on what happens in the US, and think more deeply whether any next step of a central bank would cause unnecessary pain.
To conclude, we have to guard against populist demands or unconstitutional takeovers of central banks, and do a detailed examination of the way non-cooperation among central banks contributed to the Great Depression. With all of that in mind, doing nothing is not really an option.
• Lagardien, an external examiner at the Nelson Mandela School of Public Governance, has worked in the office of the chief economist of the World Bank as well as the secretariat of the National Planning Commission.
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