When the members of the SA Reserve Bank’s monetary policy committee (MPC) pop up on our TV screens next week announcing their January interest rate decision, chances are there will be just four of them.
By the time the committee’s December meeting comes around, there should be five or more. But it’s possible, though hardly desirable, that they could be four entirely new faces.
Deputy governor Kuben Naidoo has departed. The president presumably won’t procrastinate forever about replacing him — or the other two deputy governors and governor Lesetja Kganyago, all of whom must be reappointed or replaced by November.
The bunching of the governorships during 2024 inevitably raises big picture concerns about the Bank’s leadership in this election year. These are, after all, political appointments. But it also draws attention to the smaller picture of the MPC itself.
It clearly matters who the MPC’s members are and whether they are any good at their job of controlling inflation. But does it matter whether it’s a quartet, a quintet, or a larger ensemble?
Financial market economists spend a lot of time trying to predict what the MPC will do at each meeting because many of their clients are traders who want to be able to anticipate or guess the outcome because it has implications for the prices of various assets.
There’s money to be made (or lost) if the market is pricing in a July rate cut, say, but it’s probably really going to be September. Identifying the “doves” and “hawks” on the committee and betting on which way the balance between them will tip is one way of predicting the outcome.
How useful this is can be a question. Committee members can and do change their votes during the three day meeting, or may even vote tactically: you might support a 50 basis point cut instead of 25 to prevent it being 100, for example. Kganyago has often protested the MPC is not an aviary. Nonetheless, there’s a whole science in financial markets to predicting and analysing voting patterns.
Markets might not care much about the absolute size of the committee. But an even number of members means the governor has the casting vote in the event of a tie. A quartet scenario means the governor’s traditionally hawkish stance is bound to prevail if it’s a hard-fought decision. There could be a few such decisions in a year that is expected to start the interest rate cutting cycle at some point. Central bankers often don’t like even numbers precisely because the governor’s preferences can become too visible and too dominant.
To most of us, watching to see whether we will pay more or less on our home loans or earn more or less on our savings, the intricacies of each meeting surely don’t matter much. What does matter is the quality of the committee’s decision-making, and how successful it is in controlling inflation — in the interests of balanced and sustainable economic growth, of course, as the constitution says.
So how many members does an MPC need? SA’s is quite small compared to the 12-member Federal Open Market Committee, which makes interest rate decisions in the US, or the nine-member Bank of England monetary policy committee, or the European Central Bank’s large governing council. In those markets the economists really have to work at it to puzzle out who is who in the aviary and how they will vote.
Here they’ve had an easier time. The committee has been just five strong in recent years, comprising the governor and his three deputies (who are ex officio on the MPC) plus head of research Chris Loewald. It has in the past been as large as seven members and can in theory go to eight.
Indeed, the very first MPC, which then governor Tito Mboweni established when inflation targeting was introduced in 2000, was 15-strong, including various Reserve Bank officials who were neither economists nor monetary policy or financial markets experts.
When that proved unwieldy Mboweni trimmed the number. His successor, Gill Marcus, put internal terms of reference in place to formalise the structure. The governor, in consultation with his/her deputies, can invite up to four other Reserve Bank staff members to join.
A case could be made for a larger committee, with more diversity of views, that would be less likely to fall into groupthink. In practice, the voting members of the committee are joined in the three day MPC meetings by a larger group of Bank experts who don’t vote. But the Bank has long said it wanted to add a member or two. It’s not clear why it has not.
Changing the committee’s structure to allow for members from outside the Bank — as some economists have called for — would be risky. At best, it would complicate the MPC’s communications, because external members would not be subject to the same disciplines and accountability — and consistent communications matter a great deal in monetary policy. At worst it could open up a Pandora’s box of political calls for representation on the MPC.
In the end though, how many people are on the committee is less important than who they are — and whether they and their interest rate decisions are credible. It will be hard for the Bank to keep inflation in check unless businesses, trade unions and market players believe it is committed to its mandate of price stability and capable of delivering on it. If they don’t, inflation will quickly spiral and it will take steep interest rate hikes to contain it.
SA has done well on getting inflation and interest rates down over the past two decades, and in the past two years the Bank has done far better than most advanced country central banks in the fight against inflation. Its credibility as an institution has been a crucial bulwark for an SA economy that has disappointed investors in so many other ways.
But we surely can’t take that credibility for granted in a year in which the Bank’s entire leadership comes up for renewal, by a president who might be making all sorts of pre- and post-election political trade-offs.
The law requires the governor to be a person of “testing banking experience”. But there are, disturbingly, no criteria for deputy governors, and no formal process governing their appointment, which is entirely the president’s prerogative. We just have to hope he makes sensible, credible decisions, sooner rather than later.
• Joffe is editor-at-large.
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