Central banks are facing an unprecedented challenge in the modern world as they manage important, but unpopular, currencies at a time when the cost of living is the most emotive issue in every country.
When some think about this grim reality, they might not immediately call to mind old temples, treasuries and centralised mints where metals are melted and minted into coins for commerce in an ancient civilisation.
It is not breaking news to say tough times await businesses and households. For those who did not get the memo previously, the central bank sent the message to the country loud and clear on Thursday.
The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) raised the repo rate by 25 basis points to 7%. This comes as the geopolitical tensions between the US and Iran continue to interrupt the flow of goods and fuel at the Strait of Hormuz.
Upon announcing the new repo rate, the SARB governor Lesetja Kganyago sent signals that the MPC expects a high-inflation, low-growth environment after the consumer price inflation print for April surged to 4%.
Nobody needs to tell the SARB or the MPC that hiking rates or keeping the rate at a high level is an unpopular monetary policy decision. But Kganyago will tell anyone who will listen that the central bank’s mandate includes maintaining the value of the currency as well as managing price pressures.
Some might be of the view that the SARB’s monetary policy approach is a response to supply-side shocks, which the central bank can’t do anything about, and therefore a hawkish approach to inflation targeting is a waste of time to this camp.
From the silique to the denarius, to paper money in the east, to the peso, the global financial market has learned centuries of hard lessons from the trials and foibles of the dominant currencies of world history.
When the affordability crisis comes to the fore, it is easy to lose sight of the importance of preserving the value of the currency. The rand is one of the best-performing and most trusted currencies among emerging economies.
There are plenty of examples of strong, stable and trusted economies going into freefall and becoming worthless, even in ancient history. Many practical tools were used to debase these currencies by rulers looking for popular interventions for the rising cost of living.
Take the silique, for example. This was a silver coin used in ancient Rome, which was eventually subjected to clipping, a practice used to extend the content of a silver coin by shearing off its edges.
According to George Cooper’s book The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market Fallacy, small portions of these precious metal coins would be shaved off for profit in a practice that ended up being regarded as not too different to counterfeiting.
Over time, clippings would be accumulated and gathered together to make more coins. When authorities got the hang of clipping, fortune seekers resorted to a more subtle method called sweating, which is placing coins in a bag and shaking them rigorously so that tiny fragments are collected at the bottom of the bag, and the coins wear down more slowly.
Another trusted ancient Roman currency, the denarius, was made from pure silver. Several emperors systematically debased the currency. Around 64 AD, Emperor Nero reduced the denarius to a 94.5% fine.
In the year 180, Emperor Commodus reduced the denarius’ weight by one eighth to 108 to the pound. Emperor Domitian further debased the currency by reducing the minimum required silver content in the coin. Within centuries, the denarius was a bronze coin with a silver coat of paint.
Over about 2,500 years of financial history, currencies have dominated global commerce, seemed permanent in the money market, and then collapsed and were replaced by something else.
From the silique to the denarius, to paper money in the east, to the peso, the global financial market has learned centuries of hard lessons from the trials and foibles of the dominant currencies of world history.
What happened 2,500 years ago gives us important lessons for today. The SARB and other central banks have many powerful tools to address the cost of living and preserve currency value, which is good for everyone.
One of the most powerful and simple weapons that the SARB has is its language. Just by putting restrictive monetary policy language into the market, the central bank has a powerful impact on consumer spending behaviour, and that alone can go a long way in keeping inflation in check.
We would do well to place our trust in the MPC’s approach to fighting this fresh, hellish wave of inflation, and we will likely be back to pounding inflation back down to the 3% official target point in due time.
When living costs are surging and wages struggle to keep up, relief measures are always worth considering. Chase the affordability rainbow, by all means, but pay crucial mind to the delicate currency buying-power twinkle in the corner of your eye.
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