The South African Reserve Bank’s Monetary Policy Committee (MPC) kept the policy repurchase rate unchanged at 6.75% at the conclusion of its meeting yesterday. Its inflation forecast has slightly improved to 4.5%, 5.1% and 4.6% in 2019, 2020 and 2021 from previous forecasts of 4.8%, 5.3% and 4.7%, respectively. Core inflation has also improved to 4.5% and 4.8% in 2019 and 2020 from 4.8% and 4.9% at the last MPC meeting; the forecast for 2021 remained unchanged at 4.5%. The balance of risks is assessed to be balanced.
In addition to a slightly improved inflation outlook, the bank has revised economic growth to 1.0% this year from 1.3% previously, due to the expected contraction in real economic growth in the first quarter driven in part, by Eskom’s load shedding. Risks to the growth outlook remains on the downside.
Given this prognosis, leftist monetary policy pundits are of the view that the SARB missed an opportunity to cut rates to stimulate economic growth and job creation. They may be partially right about that and they are supported by the shift in the voting split from a unanimous hold in rates at the March MPC to three members preferring to keep rates unchanged while two members preferred a 25 basis point cut in rates. More so, the Quarterly Projection Model now forecasts one 25 basis points curt in rates by the end of the first quarter of 2020.
To further support their stance, other reasons that are cited include the fact that the Unite States Federal Reserve, the European Central Bank and the Bank of Japan, have all been using monetary policy through quantitative easing, to stimulate their economic growth. Furthermore, they point out that in previous cycles, the SARB cut rates from 21.85% in September 1998 to 11.75% in June 2000, then from 13.5% in March 2003 to 7.0% in June 2005 and from 12% to 5.0% in the aftermath of the 2008 financial crisis.
Even though the inflation prognosis is somewhat supportive of lower rates, the monetary pundits preferring cuts are wrong in their view that monetary policy can be used to solve the country’s growth problems, especially over the long term. The ideal that when growth is low, the SARB can cut rates because we should be able to tolerate higher inflation is somewhat light because a large proportion of consumers that are unemployed cannot in truth tolerate high inflation.
Previous interest rate cuts happened in response to the 1998 Asian financial crisis, the 2000 dot com bubble, and the 2008 global financial crisis. We are not in a crisis which need short term emergence stimulus to advocate for the SARB to institute emergence interest rate cuts.
More so, citing advanced economies monetary policy stance as examples of what South Africa, a small open emerging market, should follow is devoid of any basic understanding of monetary policy. First while advanced economies are fighting low inflation, emerging markets like SA are fighting high inflation reflected in above-target inflation expectations. Monetary policy stances cannot therefore be the same.
A learned fellow panelist on one radio station lamented that the SARB should do more by financing low cost housing and similar social development. However, we have a number of development institutions such as the Industrial Development Corporation, the National Empowerment Fund, The Development Bank of Southern Africa and the Land Bank, whose mandates are to fund such social infrastructure. If the reasoning is that the SARB must take over these functions, effectively, it means that these institutions are failing to fulfill their mandate. In any case, this will make the measurement of the SARB’s success so difficult because of the multiple functions outside conventional monetary policy.
What is surprising is the silence on the need to improve productivity in the productive sectors of the economy. Unfortunately, the unsuspecting followers tend to agree with those that lump all the growth issues on the SARB and absolve all other institutions that are responsible for industrial policy of the responsibility. It is time that we move away from misplaced ideology and think and debate evidence based policy. The re-establishment of an economic policy research unit in the presidency is a welcome development that will go a long way in aligning government policy.