The South African Reserve Bank’s monetary policy committee is implementing a “restrictive” approach to inflation targeting and requires significant changes to the way it is constituted to ensure that inflation targeting does not impede other economic priorities.
This is according to a paper commissioned by an NGO and conducted by independent economists. The paper said the restrictive monetary policy of the Reserve Bank’s (SARB’s) monetary policy committee (MPC) was one of the reasons for low growth, erosion of the real value of household disposable incomes and higher unemployment.
“The composition of the MPC of the SARB should be amended to become more inclusive and democratic, as any decisions on interest rates have profound direct and indirect effects on the wellbeing of households.
“It is recommended that the MPC should consist of 12 members: two persons from each of the following six institutions and organisations: the SARB and the National Treasury, namely the director-general and [a] chief economist ex officio.
“[It should also include members of] parliament from the relevant standing [and select] committees, the banking, the investment and financial services sector, key employer organisations such as the Minerals Council, Consulting Engineers SA, Business Unity SA, and key trade unions.”
It is recommended that the MPC should consist of 12 members: two persons from each of the following six institutions and organisations: the SARB and the National Treasury, namely the director-general and [a] chief economist ex officio.
— Paper
The paper was written by Dr Roelof Botha, an independent economist, and Prof Ilse Botha, an economics researcher. It was peer-reviewed by Johann van Tonder, an independent economist, and commissioned by the Inclusive Society Institute.
The paper adds that the current monetary policy approach added pressure in an environment where households are still struggling to recover from the effects of the lockdowns, all of which are threatening the country’s fiscal stability.
“This study has confirmed that the increase in the consumer price index to above 7% in 2022 was solely due to the worst combined increases in global freight shipping rates and oil prices in history.”
The report said these price increases were eightfold and fivefold, respectively, due mainly to the lockdowns induced by the Covid pandemic and the military invasion of Ukraine by Russia.
“The average real prime rate during the tenure of Gill Marcus was 3.4%. It is now 6.8%, representing an increase in the real cost of credit of 100%.”
The paper said each MPC member should have at least 20 years’ experience in macroeconomic research and a minimum qualification of a master’s degree in economics, and the final selection of MPC members should be the responsibility of the finance minister, for approval by the cabinet.
The average real prime rate during the tenure of Gill Marcus was 3.4%. It is now 6.8%, representing an increase in the real cost of credit of 100%.
Approached by Business Times recently on this matter, the Reserve Bank said, “Changing the composition of the MPC to include private sector economists is not currently a consideration. By law, monetary policy resides with the governor and the deputy governors.”
The central bank said the MPC comprises the governor and the deputy governors and up to four other full-time staff members.
“These staff members, who serve at the discretion of the governor and the deputy governors, provide expertise and guidance based on their monetary policy experience.”
The idea of changing the composition and mandate of the central bank has also swirled around within the governing ANC. In its 2017 conference, the party resolved that the government should buy all privately owned SARB shares to change its mandate to include job creation.
This was walked back, ostensibly upon the realisation that the SARB, in fact, gets its mandate from the constitution.
Zuko Godlimpi, deputy minister of trade, industry & competition, who also heads the ANC’s economic transformation subcommittee, said the party was not considering any changes to the mandate of the SARB or the composition of the MPC.
Independent economist Duma Gqubule said the central bank must include people who understand the economy and the impact of prices on ordinary South African households and businesses as “activist” members.
“I agree 100% with the [paper]. We need to get external members into the monetary policy committee. Over the past 12 years, we have never had a situation of demand-pull inflation. Inflation was caused by supply-side shocks... When you have supply-side inflation, and you respond to it by raising rates, it is the equivalent of shooting blanks at a target.”
Dawie Roodt, economist at Efficient Group, said he did not agree with calls to make the process of determining monetary policy more “democratic”, because such decisions needed to come down to a “relatively small, good committee”.
“The idea is this extreme form of democracy when it comes to making decisions about interest rates. The reality, however, is that you need somebody to make a call somewhere. If we allow the whole of parliament or the whole of South Africa to decide about interest rates, will we make the right decision?”
Redge Nkosi, the executive director and head of research for money banking and macroeconomics at Firstsource Money, said while it was appropriate to change the MPC’s composition, it was more important to change its worldview of monetary policy.
“It’s not necessarily the number that matters. What matters is the understanding of economics that works for the people… You can collect a hundred of them. Almost all of them will have a stance that the IMF and the World Bank enjoy.”
Business Times
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