RAYMOND PARSONS: The Bank might draw less flak if MPC’s dissenting views were aired

“If it ain’t broke, don’t fix it” is a well-known mantra that could be broadly applied to the Reserve Bank’s role in the economy in light of the debate and recommendations at the recent ANC policy conference.

As a highly respected and professional central bank, it is one of the few institutions in SA not hollowed out by state capture and corruption. Its prestige and integrity are among the country’s national assets in an uncertain and volatile world, and a vital component of market confidence.

The latest ANC policy conference has nevertheless again demanded the “nationalisation” of the Bank, and several economists and commentators have criticised the proposal as expensive and risky. In reality all are wasting their words. The present Bank governance structure is already giving us the best of both worlds.

Blame is being laid at the wrong door. But it is symptomatic of the low level of trust in SA’s public debate that a proposal that will in practice make absolutely no difference to how monetary policy is decided in the country elicits so much misapprehension, regardless of its cost.

Though it stands on a different technical level, the ANC proposal that the Bank (like the US Federal Reserve) should have a dual mandate to include employment may in SA circumstances raise more questions than it answers. But further public engagement with the Bank around this issue could nonetheless be helpful. We may differ about what our monetary policy ought to be at any moment in time, but whatever it is the Bank still stands as both a credible and powerful instrument to implement it.

To do so it rightly enjoys instrumental autonomy to meet its constitutional mandate “to protect the value of the currency in the interests of balanced and sustainable growth”, within the inflation target set by cabinet. However, what is more interesting now, especially in the light of a strongly altered global and domestic economic environment, is whether the existing monetary policy committee (MPC) decision-making structure is still suitable and appropriate in all respects. Is there anything to consider changing here?

The Bank’s MPC meets every two months to review the economy and decide on interest rates. In making the announcement governor Lesetja Kganyago usefully indicates how the MPC voted on the decision. Significantly, at its July gathering the vote was split three ways: three votes for a 75 basis point (bps) rise, one vote for 50 bps and one vote for a 100 bps increase. Majority voting, as opposed to unanimity or consensus, now creates a new set of dynamics to interrogate.

Fortunately, there has been a valuable accumulation of academic research over the past few decades about committee decisions on monetary policy (and their particular dynamics) in different parts of the world. This has been mainly in response to the global trend, including by the Bank, to move away from unilateral monetary policy decisions by single all-powerful central bank governors and towards more inclusive decision-making. Since the late 1990s the MPC system has ushered in collective decision-making on monetary policy to the point where it has become the rule rather than the exception in central banks.

So how does the Bank’s MPC measure up to the research outcomes so far? To begin with, account must be taken of the broader economic and political circumstances that eventually shape the institutional framework of monetary policy decision-making in various countries. Though research assists in identifying convergent global trends, allowance must inevitably be made for the different overarching factors of history, tradition, structural characteristics and political economy that are also embedded in a monetary policy decision-making process. What the global research can helpfully yield is what so far has been found to work internationally, and where.

What is the right size for an MPC? There is a trade-off between ensuring that the committee is big enough to include members with all the relevant expertise, but small enough for individual members to have a meaningful debate. The estimated ideal MPC size under normal economic conditions derived from academic literature is seven to nine members.

But the research also emphasises that economic turbulence makes information pooling more difficult and countries with higher uncertainty need more MPC members. One study argues that (within limits) “the larger a monetary policy committee, the smaller the policy error”. The Reserve Bank’s MPC has only five members, but can go up to seven members. Should it be enlarged?

In global studies it has also been found that under economic uncertainty groups are better able than individuals to form a view of the appropriate policy. It is even suggested that in a more uncertain environment the policy proposals emanating from staff are less likely to be right. Elevated levels of uncertainty seem both globally and domestically to have now become a permanent feature of the economic environment. And as emerging economies usually have to contend with a less stable economic environment, the ideal MPC size in their case should therefore be larger.

Regarding the composition of the MPC, it is internationally well known that such structures should have external members. These members may be chosen to both increase the legitimacy of the central bank as well as to diversify its range of expertise. The balance between internal and external membership is seen as less important when minutes are publicly disclosed so that members are accountable as individuals. For some central banks, however, the costs of public disagreement may nonetheless be perceived as too high to successfully manage monetary policy.

This may also be a bridge too far for the Bank, whose MPC has always been completely internal and which relies on its regular public statements to inform the nation of its decisions. Should the MPC statement perhaps be restructured? And where dissentient votes are cast, reasons for the dissent could be included in future MPC statements. Making a minority view public in this way may also foster public understanding of the challenges in setting monetary policy.

The MPC mechanism through which the Bank decides monetary policy compares quite well with global best practice. But there is nonetheless room for new thinking. Perceptions around monetary policy do matter. The Bank would do well to seize this moment to introspect as to whether, in drawing on its own and international experience, there are useful changes that could be grafted onto the functioning and presentation of the MPC in ways that enhance the management of monetary policy in SA.

• Parsons is a professor at the North-West University Business School.