President Cyril Ramaphosa with Prof Klaus Schwab, founder and executive chair of the World Economic Forum, in Davos, Switzerland. Picture: GCIS/JAIRUS MMUTLE
President Cyril Ramaphosa with Prof Klaus Schwab, founder and executive chair of the World Economic Forum, in Davos, Switzerland. Picture: GCIS/JAIRUS MMUTLE

In the midst of the debate in SA about the mandate of the Reserve Bank, one of the world’s biggest banks has warned that inflation credibility is crucial to giving policy makers a weapon to deal with market turbulence without resorting to growth-harming interest rates.

“I know right now there is a bit of a question about the mandate of the South African Reserve Bank,” Catherine Mann, global chief economist at Citigroup, said in Davos, Switzerland, where she is attending the annual World Economic Forum (WEF). 

“In a number of emerging markets, the central bank having an inflation anchor and showing the ability to manage the overall economy effectively ... has given those economies a more stable environment in the face of cross-border capital flows.”

Inflation eased to 4.5%, the mid-point of the 3% to 6% target range, in December, according to data released by Statistics SA on Wednesday

The Reserve Bank’s mandate burst into the public domain when the ANC released an election manifesto on January 12, which stated that policy makers should consider growth and employment when deciding on policy. It also got caught up in intra-party ANC disagreements on whether the Bank should be nationalised, although ownership has no bearing on its monetary policy decisions.

The party fell short of asking for a formal change in the Bank’s mandate, and President Cyril Ramaphosa said later that the institution’s independence was “sacrosanct”. 

The central bank’s independence and the credibility of its commitment to price stability, via the targeting of a 3% to 6% inflation range, has been cited by credit-rating agencies as one of the factors supporting the country’s credit rating and ability to attract capital needed to funds its deficits.

Central banks that have inflation credibility have a better ability to shield economies in times of capital outflows as they have less need to raise interest rates to prevent capital outflows, Mann said, echoing comments by Reserve Bank governor Lesetja Kganyago, who’s also in Davos.

Policy makers who have demonstrated their ability to control inflation “have more flexibility not to, in a knee-jerk way, raise interest rates in an environment where the currency is under stress,” Mann said.

“That’s an important ingredient because if you are an emerging market and you face an environment of capital outflows, currency depreciation, concerns about inflation rising, and your knee-jerk reaction is to raise interest rates to induce the capital to stay in the country, the consequence of that rise is that it slows down the domestic economy.”

Central banks’ explicit mandate

Discussing policy by two of the three biggest central banks — the US Federal Reserve and the European Central Bank (ECB) — Mann reiterated that the lack of an explicit mandate doesn’t mean policy does not take into account the broader economy.

“Both institutions have been adding the vocabulary ‘data dependence’, which is basically saying that, whatever their actual mandate is, they look at the broad economy when determining the appropriate monetary policy stance. They are also sensitive to movements in financial markets, although that is not explicitly in their mandate,” Mann said.

“They are both attuned to financial markets because of this feedback loop between financial market turbulence and the real economy. Even though neither institution has financial markets in their mandate, they both recognise this feedback loop.”

Kganyago, whose term is due to end late in 2019 but who has indicated a willingness to stay on, has said those calling for a change in the Bank’s mandate or closer co-ordination with fiscal policy haven’t been watching its work because it has always done that within its constitutional mandate.