By Sizwe Godide-Mbele
In one of the public lectures early in November, the Governor of the South African Reserve Bank (SARB) Lesetja Kganyago had to defend the SARB’s single mandate and its approach to target inflation in executing the monetary policy.
Specifically, the Governor was responding to the growing calls that the mandate of the SARB needs to be reviewed with an intention to extend (it) to include economic growth and job creation.
The discontent voices due to poor economy leading to unbearable high unemployment, excruciating poverty levels, intolerable inequality heights are expected – and righteous.
However, a pocket of opinion makers and politicians have resumed their crusade of questioning the overall conduct and performance of the SARB, its solitary mandate, and its strategy to fulfilling the price and financial stability.
These individuals and groupings are hijacking the concerns and vulnerabilities of South Africans and intend to change the mandate of the SARB for their own self-interest. The SARB should not be a readily available sacrificial lamb for the poorly performing economy. Emphatically, the SARB should resist any calls to extend its mandate beyond price stability.
Undoubtedly, the SARB leadership is open to debate on its strategy. However, the unfortunate situation is that the debate is always clouded by the confusion of the distinct subjects namely, the SARB’s mandate, ownership, and independence, as well as the deliberate aggregating or amassing of these subjects into one.
To be clear, these concepts are mutually exclusive and any attempt to cluster them together indicates either a limited understanding of economic principles or a deliberate attempt to bring confusion or both. Though related in some way, each could be pursued with a combination of others. We laser-focus on the mandate of the SARB.
As South Africans feel the effect of a poor-performing economy, exacerbated by the increased trajectory in interest rates, there is renewed pressure that the mandate of the SARB should include employment targeting and economic growth. Interestingly, the protagonists of extending the mandate hardly raise their voices when interest rates are on a downward trajectory.
Hence, one suspects that the call to extend the mandate has everything to do with the pricing strategy. The mandate is a proxy.
In fact, others have already been explicit in their criticism, questioning the “superiority of inflation targeting above economic growth and (full) employment”. Supporters of this argument insist that maintaining price stability constrains economic growth and job creation, and therefore, this position is both repugnant and inconsistent with the government’s broader economic strategy and goals.
Others have called for a hierarchical mandate which puts emphasis on inflation control even in the short run and not enough on stabilising output, which is likely leading to excessive output fluctuations in the short run. Under hierarchical mandates, price stability or low inflation is typically the principal objective, and other objectives can be pursued only once the inflation objective is met.
We should reject with utmost contempt the calls to extend the mandate because the existing mandate already takes into account economic growth. The SARB leadership and policymakers should heed the lessons from other countries that have seen no value in dual or multiple mandates. Literature indicates that even countries such as the US with a dual mandate are contemplating resolving to a single mandate.
Price stability is the cynosure of the monetary policy. A single mandate eliminates ambiguity around multiple issues. It drives focus that filters through other critical macroeconomic goals such as employment and economic growth that are central to South African socio-economic challenges.
A single mandate of price stability underpins the stability of the financial system and financial markets. The SARB understands that the monetary policy is most effective when the public is confident that the central bank will act to keep inflation low.
The challenges facing the South African economy require more of a fiscal uplift, of course with coordination with SARB, and this provision is already in the conduct and performance of the Bank.
Ben Bernanke was correct when he asserted that monetary policy is not a panacea to structural issues. Hence, there should be greater coordination between fiscal and monetary policies.
Our constitution already mandates the SARB, in pursuit of its primary object, to perform its functions independently and without fear, favour, or prejudice, however, there must be regular consultation between the Bank and the Cabinet member responsible for national financial matters.
It is a distorted view that the SARB is narrowly focused on the inflation target only, as there is evidence that the Bank also considers economic growth and broader goals when setting policy.
This is because, to use Janet Yellen's advice, “monetary policy ultimately must be conducted in a pragmatic manner that relies not on any particular indicator or model but, instead, reflects an ongoing assessment of a wide range of information in the context of our ever-evolving understanding of the economy”.
Hence, price stability is the fulcrum around which macroeconomic goals such as employment and economic growth swing.
The importance attached to price stability characterised by low and stable inflation is to prevent inflation which reduces purchasing power and erodes living standards. With price stability, individuals can hedge or protect themselves against inflation thus yielding steadiness to the value of money which in turn can enhance growth prospects.
Urjit Patel, former Governor of the Reserve Bank of India once observed that “the best way that a central bank can support growth on a durable basis is to ensure inflation is low, stable - there is financial stability - and that is the role that the central bank plays”.
Henceforth, SARB’s inflation-target setting anchors inflation expectations while creating transparency and certainty in the Bank's policy position. In turn, this creates an environment conducive to sustainable long-term economic growth that is a cornerstone of business requirements. Because it is true that volatile inflation reduces the relative income, thus severely hurting the poorest, the Bank should be obsessed with a single mandate.
The SARB understands that inflation is cancerous and if unguarded, it destroys the entire economy.
Price stability means that inflation remains low and stable over the longer run. When inflation is low and stable, people can hold money without having to worry that high inflation will erode their purchasing power.
With stable prices, consumers and businesses don’t have to worry about rising or falling prices when making plans, or when borrowing or lending for long periods. In short, the economy can run efficiently when inflation is low and stable. An economy with low and stable inflation provides economic conditions that are friendly to business planning, saving, and investing, which results in a growing economy for the benefit of everyone, including the poor.
The SARB should resist the call to extend its mandate and stick with a single price stability mandate.
Sizwe Godide-Mbele is an independent consultant on strategy, country investment strategy, international business and project finance.
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