Central bankers seek the Goldilocks zone

It’s perhaps a sign of the turbulence of the past few weeks that it’s a mere four days before the Reserve Bank makes its latest policy decision and governor Lesetja Kganyago has barely been in the news. There’s been little noise and unsolicited comment from the usual crowd.

Do they know that, by all accounts, the Bank will leave the repo rate unchanged on Thursday, despite an economy still in the doldrums, inflation under control and a new round of stimulus in Europe?

And then the US Federal Reserve is set to cut interest rates again the day before the Bank makes its policy decision. It’s safe to say that in the leadup to that decision, and after, we’ll be treated to the usual spectacle of the US president hurling insults at the head of the Fed via Twitter.

Last week Donald Trump determined never to display anything resembling the dignity that should come with high office was calling Fed chair Jerome Powell and his

colleagues “boneheads”. US national debt has ballooned since Trump took office and he wants them to cut rates to zero so he can refinance it cheaply.

Who would have thought SA, the country of “quantity easing”, would be the adult in the room.

Nevertheless, it might seem counterintuitive to some that the European Central Bank (ECB), which oversees an 18country economic area with an unemployment rate of 7.5%, has cut rates deeper into negative territory and started yet another quantitative easing programme.

Yet here, with an economy set to grow less than 1% in 2019 and record unemployment, we are likely to see the repo rate unchanged at 6.5%.

That might have to do with the different set of inflation problems. In the euro area, the problem is too little inflation, meaning it is nowhere near meeting its target of keeping the annual inflation rate “below, but close to, 2% over the medium term”. Instead it sees inflation of 1.2% for 2019, slowing to 1% in 2020.

In other words, so far it’s failing its mandate and some members of its governing council, excluding those from Germany and a few other countries from the north, are fearful that if they don’t act the region will turn into another Japan with its almost three decades of deflation.

One might think that falling prices are a good thing. The problem is that they create a vicious cycle in which consumers, expecting things to get cheaper, delay spending. When consumers stop shopping, there’s no incentive for businesses to invest.

Europe, or at least its central bankers, has been exercised by this scenario since the outbreak of the sovereign debt crisis about a decade ago. Their problem is that years of negative rates and quantitative easing haven’t been a resounding success, and to their opponents going the same route again is just a confirmation of the definition of madness.

From an inflation rate that was just below zero when quantitative easing was first undertaken to where it is now doesn’t, on the face of it, look like much of a return on €2.6trillion.

ECB president Mario Draghi’s decision to spend another €20bn enraged Germans, including the head of the Bundesbank, one of the ECB governors who should have been expected to respect the concept of collective responsibility and keep his reservations private.

Jens Weidmann, whose campaign to replace Draghi when his term ends later in 2019 went nowhere partly because he was perceived to be an inflexible policy hawk who would sit idle when the next crisis came, let it be known that he thought the ECB had “overstepped the mark”.

Germany’s Bild newspaper called the ECB president a “Dracula” intent on sucking the savings of thrifty Germans. The Dutch central bank head issued a statement saying the actions were “disproportionate”.

If the ECB were a political party somebody would have been expelled by now. Imagine a couple of the Bank deputy governors, say Kuben Naidoo and Fundi Tshazibana, issuing their own statement on Thursday attacking Kganyago if the outcome of this week’s meeting is not be to their liking.

Whatever the protestations, Draghi can argue that he is simply doing whatever it takes, to coin a term he made famous at the height of the eurozone crisis, to meet his inflation mandate. But his actions reduce the potency of his constant refrain that monetary policy can’t solve everything and that governments, read Germany, should come to the party with a healthy dose of fiscal stimulus.

Why should they when the ECB is ready to throw limitless amounts of money at the problem?

Back home, the inflation rate is not exactly undershooting the 3%-6% target. The Bank’s communication that it wants the rate anchored at the midpoint might have confused things though, because many commentators now see 4.5% as the actual target and rightly ask why the monetary policy committee is not cutting rates with inflation at 4%.

But in setting policy, the Bank looks forward, not to last month’s reading, and the interesting part will be how far it goes go in revising its forecasts in the face of a weak economy. Results from retail companies continue to signal a lack of demand. The rand’s recent strength means there won’t be much inflation coming from the currency.

Maybe there might be room for the monetary policy committee to surprise. But if you are looking for entertainment, your best bet is Donald Trump.