South Africa's Reserve Bank repeatedly attacked by Politicians

The Bureau for Economic Research (BER) economists have proposed three scenarios for the South African Reserve Bank if its independence is continued to be questioned by politicians.

The SARB has been under fire from political leaders in recent years, with top members of the ruling African National Congress (ANC) stating that modifications to the central bank’s mandate are being considered.

The party seeks to modify the central bank’s mandate to include employment objectives. The Reserve Bank has repeatedly rebuffed this suggestion, claiming that employment is a characteristic of economic development, which is a structural issue with the national government.

Senior ANC leaders have proposed changes to the SARB’s mandate, as well as recurring discussion of nationalising the central bank. Markets respond unfavourably each time it is hiked, requiring the National Treasury and, more often than not, the presidency to come out and conduct damage management.

According to the BER, the majority of economists believe that inflation targeting is the best mandate for a central bank. It said that introducing concepts such as a “dual mandate” is a red herring because a sustainable, low-inflation environment already includes a sustainable employment environment. The aim is always price stability.

The long-term growth rate of a country, and thus its level of employment, is determined by a variety of structural and supply-side factors that the central bank and monetary policy cannot influence, such as productivity and technology, education and human capital, the quality of institutions and public infrastructure, the supply and cost of labour, natural resources, and capital, according to the BER.

Monetary policy and interest rate adjustments cannot alter the long-run or structural supply of these elements, as SARB Governor Lesetja Kganyago recently said at the World Economic Forum in Davos on proposed changes to the central bank’s mandate.

Central banks do have the ability to decide the degree of inflation in the long run through control of policy interest rates, influence on long-term interest rates, and other monetary policy instruments.

The BER stated, citing economic studies, that there is no long-term trade-off between the rate of inflation and the rate of unemployment.

“That is, a shift by the central bank to a higher rate of money growth will simply result in more inflation in the long run, with the unemployment rate remaining unchanged,” it said. “In the long run, low and stable inflation is, therefore, the responsibility of a suitably independent monetary authority.”

Significant dangers

While the central bank can do little to increase employment, politicians and their statements and interventions may surely do structural damage.

The BER observed that, in the near run, a negative trade-off connection exists between interest rate levels and real economic activity, resulting in a severe political-economic dilemma.

“If the monetary authority’s commitment to low and stable inflation lacks credibility, price- and wage-setting will simply assume that the short-term trade-off will be exploited,” the BER said.

“Lacking a credible commitment to an inflation target and monetary policy independence from political influence, prices and wages may simply rise in equilibrium as market participants assume that interest rates will be cut whenever politically expedient.”

According to the BER, this would enhance inflation expectations over time, leading to either higher actual inflation rates or, alternatively, monetary tightening to break the self-fulfilling loop in which greater expectations affect price-setting behaviour.

In a South African context, should political interference step into the SARB’s mandate, price-setters in South Africa would simply expect “the periodic loosening of monetary policy in order to provide a temporary jolt to economic activity”.

The economists stated that it is unclear if politicians truly want to interfere with the SARB or merely use it as a convenient instrument in party politics.

Whether the ANC is serious about modifying the Reserve Bank’s mission or merely exploiting it for internal politicking, the BER warned that “thinly veiled attacks” on the central bank pose considerable dangers.

The economists present three potential risk scenarios:

• Scenario 1 – No mandate change, but attacks continue

In this scenario, while no mandate change ever happens, persistent attacks on the SARB potentially unnerve investors, requiring a more hawkish policy stance from the central bank in order to shore up its independence from political influence and the credibility of its commitment to price stability.

• Scenario 2 -Mandate change with little effect

In this scenario, the central bank’s mandate is changed. This then requires the SARB to explain how the change affects its monetary policy framework and public communication in order to comply with an amended Constitution.

“Under the most benign approach, the SARB would reassert its independence and argue – as the US Fed does – that a sustainable level of employment is also a non-inflationary level of employment,” the BER said.

Even if such a change in the wording of the SARB’s mandate does not materially affect the implementation of monetary policy in the long run, it may require a period of tighter policy to reinforce the central bank’s independence and credibility.

“In our view, the current leadership of the SARB would pursue this approach. However, it does then render future government appointments to the Monetary Policy Committee (MPC) even more critical, as interpretations of the revised mandate would be heavily scrutinised by market participants,” the BER said.

• Scenario 3 – The nightmare scenario

In this scenario, the SARB’s mandate is changed after a series of “pro-growth” appointments to the leadership of the bank and its Monetary Policy Committee.

According to the BER, this would amount to a dismantling of the SARB’s hard-won credibility and independence, which could seriously undermine price and general macroeconomic stability.

“Unlikely as this scenario is at this point in time, it could conceivably form part of a broader political realignment in South Africa, particularly through coalition arrangements between a declining ANC and radical political parties currently in opposition,” it said.

The BER said that none of these scenarios even need to be considered if the President, the minister of finance and other key cabinet members and senior ANC figures act decisively to shut down the proposal to change the bank’s mandate.

“For the time being, it appears that the interventions of President Ramaphosa and Minister Godongwana have successfully managed risk perceptions around the noise coming out of the ANC conference. They should be prepared to do so again, should the ill-advised proposal of a change in the SARB’s mandate resurface – possibly in the lead-up to next year’s critical general elections,” it said.