The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL
The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL

The Reserve Bank has won a court victory halting the public protector’s efforts to change its mandate. But the Bank is still fighting to prevail in the court of public opinion in the face of a series of attacks tending to focus on its price-stability mandate and its admittedly peculiar shareholding structure.

In normal times, any and all of these could be the subject of legitimate debate. But these are not normal times and there’s plenty to indicate the attacks are not driven by the cut and thrust of intellectual debate, but rather by efforts to undermine the institution itself. After all, the Bank is responsible not just for keeping a lid on inflation, but also for exchange control and banking regulation, including making sure the banks have systems in place to detect money laundering and the like.

For those involved in capturing the state and reaping the rich pickings, fiercely independent regulators such as the Bank pose a threat. Any attacks on the institution need to be seen in that context.

They need to be seen too in the context of a failing economy, which is hovering at close to zero growth — mainly because of dysfunctional politics and policy uncertainty. As the unemployment rate rises, what better distraction than to try to put the blame on monetary policy and interest rates?

Even so, this is not the first time the Bank’s inflation targeting mandate and its approach to implementing it have come under fire, and the public protector’s effort to abolish the mandate has in a way provided an opportunity for the Bank to make the economic case for inflation targeting.

The Bank has been taking advantage of any platform it can to do this and its leaders are getting better and better at it, with a lecture at the University of SA’s Graduate School of Business by governor Lesetja Kganyago last week providing arguably the strongest and most comprehensive exposition in SA’s almost 18 years of inflation targeting of why it’s good for the economy.

He made the case for why inflation had to be fought and why interest rates that were too low in the short term would mean higher inflation and interest rates in the longer term. As interesting, though, is SA’s record since inflation targeting became the anchor for monetary policy in 2000. Inflation has fallen to an average of about 6% since then, from 15% in the 1980s and 10% in the 1990s.

While the critics of inflation targeting claim it is appropriate for "rich" countries only, Kganyago argues it is, in fact, more of an emerging market tool — and a successful one, which proves that lower inflation and higher growth go together. Besides SA, 11 other emerging markets have implemented inflation targeting and those with lower inflation than SA have had better growth and lower unemployment.

As it turns out, SA has higher inflation than 80% of other countries and the gap has become worse in recent decades. One reason is that far from being ultra-tight, our inflation target band is unusually high and wide, and, unlike most other countries, SA has never revised down its target.

Indeed, the Bank’s economists calculate SA’s inflation rate should ideally be lower, at about 3% to 4%, if the country wants an inflation rate in line with those of its trading partners

"A frank reassessment of the 3% to 6% target … would probably conclude that the target should be lower," says Kganyago, who along with his monetary policy committee colleagues has frequently expressed concern about the fact that SA’s inflation expectations tend to be stuck towards the top of the target range, making it difficult to bring inflation down to the middle of the range, which is where it should be.

Indeed, the Bank’s economists calculate SA’s inflation rate should ideally be lower, at about 3% to 4%, if the country wants an inflation rate in line with those of its trading partners, enabling it to be more competitive.

That doesn’t mean the Bank plans to tighten up on monetary discipline. But it does mean that any review of the evidence would suggest tighter rather than more lax discipline is needed to support growth in the longer term. Kganyago is clear, though, that the Bank is not about to embark on a review and nor should anyone else, given that SA’s structural (and political) economic ailments are demonstrably not fixable by monetary policy

"In our current economic predicament, rethinking monetary policy may not be the best use of our time. SA has far more urgent economic challenges, in particular reducing our structural unemployment rate," he says. We can but agree.

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