IMF MD Kristalina Georgieva recently pointed to how critical central bank independence has proved to be in winning the fight against inflation and achieving stable economic growth.
The latest inflationary episode globally has not looked anything like the drama of the 1970s, when oil price shocks caused inflation to spiral out of control, triggering economic instability across the globe.
This time, says Georgieva, the response by central bankers “helped to keep inflation expectations anchored in most countries even as price increases reached multi-decade highs”. And emerging markets stood out as leaders in tightening early and forcefully enhancing their credibility, says Georgieva in a recent blog.
It is the independence of the central banks, their clear price stability mandates and the credibility they have built that’s made the difference, the IMF chief argues. The IMF’s own research shows clearly that greater central bank independence is associated with lower inflation. “The bottom line is clear: central bank independence matters for price stability — and price stability matters for consistent long-term growth,” says Georgieva.
Against that background, last week’s monetary policy committee meeting came at a good moment for SA’s central bank. President Cyril Ramaphosa recently took the bold step of reappointing governor Lesetja Kganyago and deputies Rashad Cassim and Fundi Tshazibana, as well as appointing Mampho Modise to fill the third, vacant deputy post.
The clean sweep of leadership appointments not only ensures continuity and stability for the Bank out to 2029: it is also a strong affirmation by the government of the importance of the Bank’s independence and credibility. A more independent-minded leadership would be hard to find. And the credibility the Bank has built over the past two decades has clearly stood SA in good stead in the latest episode of global inflation and uncertainty.
It’s worth remembering that even at its peak in July 2022, SA’s inflation rate didn’t go as high as 8% — well below the peaks of two or three decades ago, and indeed well below the double-digit inflation seen in the UK and US in the latest round. That was despite global supply disruptions and fuel and food price shocks, as well as local currency depreciation. But at that level SA’s inflation rate was well above its inflation target range. The Bank had acted relatively early to pre-empt inflation and inflation expectations climbing, hiking interest rates sharply from November 2021.
The repo rate has now been held at 8.25% since May 2022. And while consumers and businesses have taken pain from the sharp increase in rates and the long stretch of high rates, monetary policy clearly did have the desired effect. Inflation came back relatively rapidly to within the 5% range. The Bank’s credibility, clear signalling and firm monetary policy action clearly helped to contain the inflation monster.
Like other emerging markets, SA knows inflation’s dangers when it sees them. SA’s central bankers didn’t act as early as those of Brazil or Mexico, who started hiking rates in the first half of 2021. But it acted earlier than those of the UK, US or Europe, who got round to it only in 2022.
Many of the Latin American central banks acted more swiftly and hiked more steeply, raising interest rates in real, inflation adjusted terms to 7%-8%, whereas SA’s are still only at about 3%. That meant the likes of Brazil and Chile already had the space to start cutting rates in 2023 as inflation came down. Mexico in March became the last of the big Latin American central banks to start cutting, reducing its benchmark rate by
25 basis points to 11%.
‘Last mile’
But SA is not there yet. That “last mile” of inflation is proving hard to stamp out here, as it is in advanced economies. That makes 2024’s monetary policy hard to steer, and hard to predict. SA may officially have a 3%-6% range as its inflation target, but the Bank has made it crystal clear that it is targeting the 4.5% midpoint of that target — and not only that, but it would prefer an even lower target to make SA more competitive. At 5.6% in February inflation was still well above target. The committee made it clear it is worried about food price inflation, given the risks the drought poses. It is worried too about stubbornly high inflation expectations, especially those of business people. The rand is a risk, especially going into May’s election. So too is the timing of the US Fed’s first cut, which drives financial markets and currencies globally.
A hawkish committee last week clearly tried to dial back market expectations of an early first rate cut. The risks may not materialise and inflation may subside faster than expected. But the committee’s credibility rests on caution. Don’t mortgage the house yet in the hope of a July or September cut.
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