Protector is correct in seeking wider mandate for Reserve Bank

• An obsession with inflation and the rand is exacerbating SA’s lagging economic growth

The public protector’s recent recommendation that Parliament change the Constitution to amend the role of the Reserve Bank may not be as far-fetched as appears at first sight, whether or not it was appropriate for her to do this in terms of her constitutional function.

The Bank has been obsessively and exclusively preoccupied with one thing: using monetary policy to contain inflation and thereby support the value of the rand. Her contention that its primary function should instead be to support growth and employment may not be so far off the mark.

The accompanying two charts show a comparison between inflation and prime bank lending rates in the UK and in SA. In the UK, the 2008-9 banking crisis was far more severe than anything that occurred in SA, which was to a large extent sheltered from these events at that time.

However, the secondary “flow-through” economic effects of it have affected SA strongly in the years since, as its economy is fairly dependent on the western countries concerned. The prolonged and debilitating effect of this contagion on our economy has been underestimated locally.

The Bank of England, as with the Federal Reserve in the US, reacted immediately and strongly to counter the adverse effects of the 2008-9 crisis on business confidence, growth and employment.

UK interest rates were cut radically and the prime bank lending rate went in short order from 6% to 1.5%. It remained there for seven years, from 2009 to 2016.

Then, in response to the Brexit referendum uncertainty, it was recently dropped further to 1.25%. Since 2009, the Bank of England has also ensured that massive liquidity was injected into the UK economy to encourage growth through large-scale “monetary easing” over the same period.

Through this mechanism it flooded financial institutions with capital to promote increased lending by banks and boost economic activity by raising the confidence levels of business and consumers.

It accepted that to encourage the economy and continued investment by business the prime lending rate should, if necessary, go well below the consumer price (CPI) index inflation rate for a prolonged period. As can be seen from the chart, this happened for a period of five years and has just happened again. At one point, in 2011, the CPI rate in the UK was 5% (just below SA’s CPI rate of 5.4%), but the prime lending rate was kept at 1.5%.

The success of these policies in maintaining growth and employment in the UK during this period of uncertainty has been considerable.

By contrast, over the same period — and bearing in mind the differences in population growth in the two countries — SA’s economy has been dismal, with minimal growth and one of the highest unemployment rates in the world. We are now formally in a recession.

Of course, there are other factors at work causing this, not just monetary policy. SA’s perceived large-scale corruption and political uncertainty, with changes in the finance minister and so on, have been significant factors. But there have been major uncertainties in the UK too, such as the Scottish referendum, elections and Brexit.

The difference is that the Bank of England reacts positively, immediately and effectively to counter the economic effects of these factors, whereas our Reserve Bank does not.

To put things in perspective, if the same interest rate policy applied here as applies in the UK, the South African banks’ prime overdraft rate would be about half the CPI rate, or about 2.7% instead of 10.5%.

That is without taking into account other aspects of policy such as monetary easing, which has happened over a prolonged period in the UK, but not here.

As a result, compared to the UK economy, bank lending in SA is very constricted and economic activity levels and confidence are constrained.

If bank lending rates were dropped to even half the current rate – 5.25% — that would produce an immediate boost to business confidence, investment and employment and this would effectively counter a lot of the pessimism and gloom that prevails here.

The Reserve Bank’s obsession with nothing but inflation and the rand is doing serious damage. SA’s interest rates are way out of line with international standards.

There should certainly be more balance in the Reserve Bank’s approach, if not the complete makeover in its function recently recommended by the public protector.

BANK LENDING IN SA IS VERY CONSTRICTED AND ECONOMIC ACTIVITY LEVELS AND CONFIDENCE ARE CONSTRAINED