Bank grab will not achieve critics’ aims
In recent weeks, there have been calls to nationalise the South African Reserve Bank and cancel its constitutional mandate to defend the value of the currency and promote growth. Such calls seem motivated by the belief that this will lead to lower interest rates. In fact, neither move would change the way interest rates are currently set. But they could severely damage the credibility of the Reserve Bank itself and the way it conducts monetary policy.
Calls to nationalise the Bank reflect the view that this would increase the government’s control over monetary policy. Critics mistakenly conclude that the Bank’s independence in deciding when to change interest rates means the government has no influence over monetary policy.
The fact that the Reserve Bank has private shareholders is unusual. This structure was presumably motivated by a desire in 1921 to raise funds to capitalise the Bank. It in no way diminishes the government’s influence over the management. As in many countries, the president appoints the governor and deputy governors.
Private shareholders elect half the members of the Reserve Bank board. The president appoints the other half, and the governor has the casting vote.
As with any company, the board oversees governance of the Bank but plays no part in shaping monetary policy. Interest rates are set by the Bank’s monetary policy committee (MPC), which is made up of the governor, the three deputy governors and two senior Bank employees. Private shareholders are not represented. Nationalising the Bank would change nothing and cost the government millions of rand.
Since February 2000, the government has given the Reserve Bank an inflation target of 3%-6%. However, this is not a blind instruction that ignores issues of sustainable economic growth.
Like most central banks, the MPC broadly follows the “Taylor rule”. This suggests that when setting interest rates, consideration should be given to the difference between targeted inflation and forecasts of what inflation is expected to be. Consideration must be given to deviation between economic growth and what is considered sustainable in the long term. While greater weight is usually given to inflation, growth is not ignored.
Thus, in its recent decision to cut interest rates, the MPC was influenced both by the recent decline in inflation and the recession. Changing the constitutional mandate of the Bank would not change how it sets interest rates. If the government really believes interest rates are too high, it can simply raise the inflation target. Interest rates would then initially tend to fall, but at the price of higher inflation and higher rates later.
This raises the question whether interest rates are actually high. They certainly have dropped since inflation targeting was introduced. From April 1994 until the introduction of inflation targeting in 2000, the prime overdraft rate averaged 18.9% (11% after inflation). Since then, prime has averaged 11.6% (5.3% after inflation). Interest rates have also been much less volatile — an important benefit for borrowers.
When compared with other countries in the Brics group, South African interest rates are lower than those of Brazil and Russia and not much higher than India’s. When adjusted for inflation, SA’s interest rates are the lowest of all the Brics countries.
Critics who allege that SA is “obsessed” with inflation should note that we have the highest inflation of all the Brics countries. Few countries today have inflation as high as the 6% South Africans regard as “normal” and around which wage settlements and price increases seem to hover.
So, nationalising the Bank or changing its constitutional mandate would not reduce interest rates. Both moves would, however, damage the credibility of monetary policy. This is because they will be seen to have political motives. Caution is required.