Warning over repeated attacks on South Africa’s Reserve Bank

 ·13 Feb 2023

Economists from the Bureau for Economic Research (BER) have laid out three scenarios for the South African Reserve Bank should its independence continue to come under attack from politicians.

The SARB has come into the crosshairs of political figures over the last few years, with senior figures in the ruling African National Congress (ANC) suggesting that changes to the central bank’s mandate are under consideration.

The party wants the central bank’s mandate to be changed to include employment targets. The Reserve Bank has hit back at this proposal time and time again, saying that employment is a feature of economic growth, which is a structural issue that sits with the national government.

Changes to the SARB’s mandate have been brought up by senior ANC politicians, along with repeated talk of nationalising the central bank. Each time it is raised, markets react negatively, forcing National Treasury and, more often than not, the presidency to come out and do damage control.

ANC takes aim at the Reserve Bank

According to the BER, there is a mainstream consensus that inflation targeting is the ideal mandate for a central bank. Introducing things like a “dual mandate” is a red herring, it said because a sustainable, low-inflation environment already builds in a sustainable employment environment. Price stability is always the priority.

A country’s long-term growth rate – and hence the level of employment – is determined by a range 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, the BER said.

Monetary policy and changes in interest rates cannot affect the long-run or structural supply of these factors – a point forcefully emphasised by SARB Governor Lesetja Kganyago in recent remarks at the World Economic Forum in Davos regarding possible changes to the central bank’s mandate.

Central banks do have the power – through control of policy interest rates, influence over long-term interest rates, and other monetary policy instruments – to determine the level of inflation in the long run.

Citing economic research to this effect, the BER said 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.”

Reserve Bank responds to ANC plan to change its mandate

Big risks

While the central bank can do little to boost employment, politicians and their utterances and meddling can certainly do a lot of structural damage.

The BER noted that, over the short-run, a negative trade-off relationship does likely exist between the level of interest rates and real economic activity, which ultimately causes a significant political-economy problem.

“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.”

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”.

Over time, this would raise inflation expectations, resulting in either higher actual inflation rates or, alternatively, monetary tightening to break the self-fulfilling cycle where higher expectations influence price-setting behaviour, the BER said.

The economists noted that it is not clear whether there is an actual appetite among the politicians to actually interfere with the SARB, or simply use it as an easy tool in party politics.

Whether or not the ANC is serious about changing the Reserve Bank’s mandate, or simply using it as a tool for internal politicking, however, the BER said the “thinly veiled attacks” on the central bank carry significant risks.

The economists outline three main risk scenarios that could follow:

  • 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.

Read: Reserve Bank sounds the alarm for South Africa’s economy

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