It’s been a year of significant anniversaries for the Reserve Bank, which is now holding its latest interest rate policy meeting.
In addition to marking its 100th year anniversary, the local currency turned 60, having been introduced in 1961 when SA became a republic. The central bank has been operating independently for a quarter of a century, and has been pursuing inflation targeting for the past 21 years.
At the end of the year, the country will mark another episode related to monetary policy. It was in 1998 that SA got caught in the Asian financial crisis, and in a vain attempt to defend the rand, eventually built up $22bn in liabilities in what was called the net open forward position.
The concept was simple enough: to protect the rand in times of turmoil, the Bank would sell dollars in the spot market, but also through other transactions would build up commitments to deliver dollars in the future, which was called the oversold forward book.
It was an expensive exercise and something that has largely disappeared as the Bank adopted a monetary policy regime based on inflation targeting and a flexible exchange rate. While it does not target a level of the currency, it can still get involved from time to time when there are abrupt changes, which was articulated by then deputy governor Daniel Mminele to the Bank of International Settlements.
The Bank’s faithful application of inflation targeting over two decades means that it can hold a meeting in the midst of a mini global crisis, and do so with observers expecting an outcome that is so predictable it can almost be said to be boring. Not a single one of 19 economists polled by Bloomberg expects the repo rate to change on Thursday from 3.5%, where it has been since July 2021.
It is a testament to the success of the monetary policy regime that South Africans could observe it with a sense of detachment in a week in which global markets were rocked by sentiment in China, this time around concerns about liquidity in its real estate sector.
The rand and the JSE all share index did fall, but the 3.4% drop in the past week will not have anyone speculating about the impact on SA’s inflation rate or the potential for central bank intervention.
It is also a sign of the credibility of the regime that analysts are relaxed about the rates outlook even in the wake of data that shows inflation edging up again towards the upper end of the 3%-6% target range. According to another Bloomberg survey before the release by Stats SA on Wednesday, the rate for August will be 4.9%, up from 4.6% in July.
Investors clearly believe the Bank’s forecast that inflation will stay near the middle of the target range through to 2023 and any spikes will be temporary. Governor Lesetja Kganyago might be questioned more about his recent comments that he would like to see the target moved to a point closer to 3%, more in line with major trading partners.
There will be questions whether policymakers are overly complacent about inflation, something that is not limited to SA and may lead to more aggressive hikes later on.
The Organisation for Economic Co-operation and Development (OECD) this week raised its inflation forecasts for 2021 and 2022. It sees US inflation averaging 3.6% this year, not far off the 4.3% that the Bank expects for SA, which may argue against the urgency of shifting the local target lower, given that SA’s main trading partners are no longer running extremely low or even negative inflation rates.
There may well be a long-term case for a lower inflation target, but it is hard to see it getting political traction when the focus is on supporting the economy in its recovery.
The Bank’s credibility means it can easily justify staying put for some time. If it says inflationary pressure are transitory, very few will have a reason not to believe it. It should stay on message.
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