How ironic that the debate about the Reserve Bank’s private shareholders is heating up again, just two weeks after the governor, Lesetja Kganyago, said he would no longer involve himself in that discussion.
“We have spelt out why we were opposed to that and, quite frankly, we think it is a distraction,” he said at an event hosted by the Cape Town Press Club. While the Bank would “engage in the government process and as the legislation comes through”, this was a debate it would “leave to the president and the minister of finance”.
Reading that, I was slightly surprised, even if the reluctance to make the same point over and over again is misleading. When I started covering monetary policy again about two years ago, I asked the governor why he always said the same thing in every statement about the government needing to pursue structural reforms and monetary being not enough on its own to support growth. He would then quote one of his predecessors, Chris Stals, who said it was sometimes necessary to repeat oneself until it became clear somebody was listening.
While it’s tiring to keep pointing out that the nationalisation of the Bank, pushed by Jacob Zuma, the EFF and others, will have zero benefits for SA’s poor, it’s unlikely that Kganyago will be able to stay out of it for longer. He may need to keep repeating that a German investor is likely to be the biggest beneficiary should the ANC resolution, made in 2017, ever be implemented.
“We should rise and defend the institution should it come under attack,” he told the SABC a year ago. “Actually, I think correctly South Africans should actually rise and say, not in the name of our institution.” It’s hard to imagine the head of the institution not leading that defence against those he famously characterised as “barbarians at the gate”, rightly pointing out the biggest prize wasn’t state ownership and the supposed sovereignty that this would supposedly entail.
And the debate isn’t going to go away because the central bank doesn’t want to engage with it. With the Covid-19 hit to the economy, it may even evolve back to being about the mandate of the Bank and whether it’s doing enough to drive a recovery from what’s likely to be the biggest economic contraction since the Great Depression. It has been among the most aggressive in cutting rates and has undertaken other stimulus measures, such as easing regulations to enable the commercial lenders to extend credit.
For some this is far from enough. And they will look at the Federal Reserve’s policy changes this week as an example of what a flexible central bank should be doing. That’s even though the Fed started its study before the Covid-19 outbreak. The most radical change is that US policymakers have essentially stopped pursuing a straight 2% inflation target and would aim for an average “over time” that remained unspecified.
This means when inflation gets to 2%, it won’t immediately act and will take into account previous periods when the target was undershot. Traders took that to mean the Fed won’t respond to a recovery this time as it did in the aftermath of the global financial crisis.
Then, around 2015, it raised interest rates in a pre-emptive strike. This policy upends a fundamental principle, that policy should be forward looking and anticipate future trends in inflation. This time, US interest rates will stay at record lows for a long time even as price increases accelerate and unemployment drops.
Should anyone want to compare its approach unfavourably, the Reserve Bank can argue that a lot of this flexibility is already embedded in its 3%-6% target range. The Bank has said it wants to anchor inflation close to the midpoint of the range and most economists now view 4.5% as the actual target. The Bank argues that this gives it flexibility to tolerate deviations on either side. Maintaining inflation at the midpoint gave it the policy space to aggressively cut rates. Likewise, when inflation climbs above the midpoint, it won’t have to react immediately.
Unlike the US, SA probably won’t have a problem with inflation staying too low for long and the Bank may well argue that the country is well served by the regime. Of course, it’s going to be hard to judge the effectiveness of the US policy stance. While the Fed said it’ll tolerate inflation above 2%, it hasn’t said how it will get it there. After years of record-low interest rates and quantitative easing, the inflation rate is only running at half its target.
That’s perhaps another lesson for the Bank’s critics who see money printing as a potential panacea for the problems in the economy. It’s a policy that has been disastrous in emerging economies, while the jury is still out on its effectiveness in developed ones.
But this isn’t a debate, as that on the Bank’s ownership, that’s going to go away any time soon. Kganyago may not be able to sit either one out, no matter how much he’d like to.