Cheap talk and runaway prices
It is hard to know whether to be more concerned about Deputy Finance Minister Sfiso Buthelezi’s apparent ignorance about economic policy or his apparent antagonism towards inflation targeting.
It is worth keeping in mind that inflation targeting is government policy — the government put it in place in 2000 as the anchor for monetary policy. The Reserve Bank has to implement the policy, using interest rates and other tools such as communication to manage inflation and try to keep it in the 3%-6% range, as the Treasury mandated it to do.
But it is the government that decides, so if Buthelezi has issues with SA’s monetary policy approach, he should be getting his own team in the Treasury to do some work on whether there is a need to change it. And it is up to him and Finance Minister Malusi Gigaba to make the case if inflation targeting is not working as intended to ensure price stability and if change is indeed needed.
Instead, Buthelezi told an audience this week that the policy of inflation targeting should be opened up for debate. “The role of the Reserve Bank is a contested space. Let’s not be intellectually lazy, let’s not accept these things as gospel truth,” he said. While inflation targeting might be good for developed markets, he stated, it was bad for emerging economies such as SA’s — a contention that most economists would find rather bizarre in an age in which many developed economies are struggling with inflation and interest rates that are too low, while some emerging markets are still battling with runaway prices, which are bad for growth.
Buthelezi’s comments were a reference to Public Protector Busisiwe Mkhwebane’s report on the Bankorp “lifeboat”, which departed from the script somewhat to recommend, unaccountably, that Parliament should amend the Reserve Bank’s mandate. Her version of the mandate would remove the Bank’s core mandate of price stability by simply deleting the “protecting the value of the currency” bit in the constitutional clause that mandates the Bank to “protect the value of the currency in the interests of balanced and sustainable growth”.
The Reserve Bank has gone to court to challenge the public protector’s report and on Tuesday, filed papers in which governor Lesetja Kganyago said that the public protector’s announcement had “had a serious and detrimental effect on the economy” and that it risked further rand depreciation as well as further rating downgrades, which would cause immediate disinvestment of about R100bn from South African bonds. Absa and Parliament will also challenge the public protector’s report, which, it is argued, goes way beyond her powers by demanding an amendment to the Constitution.
Legal action apart, the issue is that maintaining price stability is a core function of central banks everywhere — and for good reason. Without the checks and balances on inflation that independent central banks exercise, governments could simply print money to fund steep fiscal deficits — and let prices take the pain, with inflation running away. Runaway inflation, as the Bank often argues, hurts the poor most because they do not have the options the rich have.
Inflation targeting is not the only way to maintain price stability. There are other approaches. Managing the money supply is a rather old-fashioned one. Managing the exchange rate to prevent its depreciation and so capping inflation is another. SA has tried both in the distant past. But history shows they did not work very well at all, nor was there anything like the transparency and predictability of monetary policy that we have come to rely on. So if the deputy finance minister thinks it is not working, he should tell us why and tell us what he believes would work better.
Or does he just want the freedom to print money?
IF THE DEPUTY FINANCE MINISTER THINKS IT IS NOT WORKING, HE SHOULD TELL US WHY