Central banks like to pretend they are insulated from politics, but this past week has shown how wishful that pretence can be. On opposite ends of the globe the US Federal Reserve and the SA Reserve Bank both faced choices under differing degrees of pressure. One cut, the other froze. Neither inspired confidence.
In Washington, Fed chair Jerome Powell opted for what was spun as an “insurance cut”. Speaking to Chris Eddy of 10X Investments on my show in the immediate aftermath, he called it for what it is: easing into an environment that looks, forebodingly, nothing like the playbooks of the past. US inflation is still sticky at just under 3%, equity valuations are frothy, credit spreads compressed, and the labour market, despite some recent easing, is still relatively resilient. In other words, this wasn’t the usual firefighting of past easing cycles. It was adding fuel to the fire.
The Fed now risks being seen less as a guardian of stability and more as a political appendage. President Donald Trump’s fingerprints are already on the Fed board of governors, with his pick, Stephen Miran, pushing for a 50 basis point cut while some members muttered about hikes. Forward guidance via the dot plot, once a prized tool, has shattered into a scattergun of contradictory projections. In such a world, every consumer price index (CPI) print becomes a live event and volatility a permanent companion.
Meanwhile, SA went the other way. I find the Reserve Bank’s hawkishness increasingly difficult to defend or explain away. On the numbers, the two minority members in the 4-2 decision to stand pat were right in arguing for a 25 bps cut. Inflation expectations are well anchored, headline CPI has eased towards 3%, the rand has strengthened and there is about as much evidence of demand-side pressure as there is of the ANC realising its economic policies are what is holding this country back.
Added to these facts is that the Fed and the European Central Bank both moved, so the Reserve Bank surely had cover. Instead, the majority clung to their private project of entrenching a 3% inflation target, even if it meant sacrificing growth in a moribund economy.
I was interested by the comments of the chief economist and deputy director-general at the department of trade, industry & competition, Stephen Hanival, on LinkedIn in the days after the meeting, which offered a rare glimpse of dissent from inside the state apparatus. He pointed to a collapsing investment pipeline, shrinking exports, rising liquidations and 8.4-million unemployed.
Retrenchments are spreading across the likes of Goodyear, Glencore, ArcelorMittal, Ford and Coca-Cola. Of course, we know the primary reasons for our economic stagnation are policy-induced, but against this backdrop the Bank’s inaction looks like dangerous detachment.
Annabel Bishop of Investec went further, showing that the Bank’s own numbers don’t add up. It now forecasts third-quarter CPI at 3.6% year on year. To get there, September’s print would have to spike to 3.9% from August’s 3.3%, which would be quite a month-on-month jump with fuel flat and food prices moderating.
That is fantasy. Meat prices eased once foot and mouth disease vaccines arrived, grain is cheaper on a bumper maize crop and processed food prices have fallen on weak demand. Rentals are surveyed this month, but no extraordinary jump is expected.
In other words, the Bank has built its hawkish stance on an inflation forecast that has no visible drivers. Worse, it hasn’t even fully included August’s official Stats SA data in its model. Instead of lowering its third and fourth quarter averages to about 3.4%, where the evidence points, it nudged them up, which conveniently substantiates its less dovish stance, with fewer cuts this year and a repo rate trajectory now increasingly divorced from the data.
What credibility is being protected here? Not the credibility of the models, which are plainly missing real-time information. Not the credibility of independence, because keeping rates high while Eskom, the National Energy Regulator of SA and municipalities drive administered costs is not independence, it is abdication. Not the credibility of transparency, because we don’t even get to read why the minority voted to cut.
The Bank has been hoist by its own petard. To entrench the 3% anchor it ignores evidence that inflation is easing. To prove independence, it punishes households and firms for governance failures beyond its mandate. To protect credibility, it risks squandering it.
The Fed is cutting into froth; the Reserve Bank is holding on to stagnation. Both decisions carry political fingerprints. Both show how orthodoxy can morph into dogma. And both remind us that central banking is not a cloistered game of decimal points, but a high-stakes exercise in judgment. Right now, judgment looks in short supply. And credibility, the currency both Powell and Bank governor Lesetja Kganyago prize above all, is being eroded by the very leadership meant to protect it.
It is telling that two quite different economies — one expanding at 3%, the other limping at 0.8% — both now have central banks making moves that risk credibility for opposite reasons. The Fed risks fuelling a bubble; the Bank risks strangling growth to prove a point. Both pretend politics has nothing to do with it, when in fact politics is everywhere: in Trump stacking the Fed board, in the Bank implicitly asking South Africans to tolerate job losses until Eskom and Nersa get their act together.
Credibility is not a theoretical anchor. It is earned through judgment. The lesson? Orthodoxy is not enough. Policy must be credible not in textbooks, but in the messy, contradictory real world.
Former Reserve Bank governor Chris Stals once said “[t]here is no such thing as central banking by rules. Discretion remains indispensable in the daily implementation of monetary policy. Economics, after all, is not an exact science. In the world of macroeconomic policy, two plus two may sometimes add up to five. The central banker must, however, never try to stretch it to six.”
• Avery, a financial journalist and broadcaster, produces BDTVs ‘Business Watch’. Contact him at michael@fmr.co.za.
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