JOSHUA NOTT: Reserve Bank leads the charge in dealing with inflation

Ronald Reagan described inflation “as violent as a mugger, as frightening as an armed robber and as deadly as a hitman”.

In the UK today both crime and inflation are running high. The consumer price index rose 10.4% in February, and the country’s crime statistics have reached record highs.

While the British government tries to get a handle on crime with a newly unveiled crackdown on antisocial behaviour, the Bank of England is left to restrain inflation by raising interest rates. It did so on March 23 by 25 basis points to 4.25%.

Meanwhile, inflation’s persistence in the US saw the Federal Reserve (Fed) raise its rates by the same margin to 4.75%-5% on March 22. The Reserve Bank’s monetary policy committee saw their puny hikes and raised the stakes with a surprise 50 basis point hike last week.

For emerging markets such as SA monetary conditions for central bankers have presented some hellish challenges since the global financial crisis of 2007/08. In the intervening period central bankers have had to contend with the 2013 “taper tantrum”, and six years thereafter a pandemic that led to capital flight and a devaluation of the rand.

Just as the dust was settling, Russian tanks and men kicked up the dirt again with their invasion of Ukraine, throwing global energy markets into a spin. The fallout precipitated a postpandemic period of high global inflation, our present predicament, strengthening the dollar as investors flocked to safer shores.

In broad terms, a strong dollar and tighter US monetary policy result in a credit crunch, slowing growth and sometimes tipping economies into recession. Emerging markets are particularly vulnerable. 

In the SA experience inflation, like crime, is no stranger. Over the past 20 or so years inflation has ranged between 0.7% and 10.1% (World Bank). As a consequence of its emerging market status and a government whose (in)actions have led to a crisis in domestic and foreign investor confidence, the Bank and its technocrats have a particularly difficult job of balancing runaway inflation without hurting what economic growth remains.

The Bank has an impressive record in this task. Thanks to its constitutionally enshrined independence and mandate to sustain economic growth and economic stability within the republic (section 224), the Bank has proved adept at walking the monetary tightrope. 

It is not alone among emerging market central banks these days — several others have distinguished themselves in recent years, most notably Brazil and India. With SA, they got a lead on the rich world by raising rates at a time when their developed world counterparts were still calling inflation merely “transitory”.

A recent analysis by consultancy Oxford Economics found that emerging markets are in general both resilient and poised for growth, in part thanks to central bankers doing their job, and doing it well. 

The Bank’s independence, inflation-targeting policies and competent officials help raise SA’s investability. Politicians questioning its independence or changing its mandate would tarnish any investor confidence that remains in SA.

Negative market reaction to such proposals is not a uniquely SA experience. Investors and business leaders alike looked on nervously in 2022 when then British prime minister Liz Truss spoke about reviewing the Bank of England’s mandate. 

Central bankers need to get a lid on inflation, and this expectation should not change. We would do better to hold them to account when they fail to do so. For their part, governments should tackle their fiscal and service delivery mandates with the same seriousness.

If the SA government were to focus less on the central bank’s mandate and more on its own we might be looking forward to a bumper, rather than bumpy, economic decade. 

• Nott works for a venture facility for public benefit and is based in London. He writes in his personal capacity.