MPC seems to lack a diversity of views

One of the more interesting reactions to the SA Reserve Bank’s latest policy decision was someone wondering why governor Lesetja Kganyago and his colleagues needed three days to reach the conclusion they settled on.

There’s been some surprise, not at the decision to keep rates on hold, but that it was unanimous. It was quite a contrast to what we saw with meetings of the European Central Bank (ECB) and the Federal Reserve, where division burst out into the open on decisions to embark on additional stimulus.

Thanks to US President Donald Trump’s public attacks on its chair, Jay Powell, the Fed already had a credibility problem, made worse by its poor communication. It cut rates by 25 basis points, prompting criticism from two officials, one arguing for a bigger cut and another saying no cut was needed at all.

If the Reserve Bank doesn’t have enough people debating policy, the ECB has the opposite problem of too many representing a diversity of countries with different interests. While leaders in debtstricken Italy welcome lower rates and more quantitative easing, in the Netherlands they are more worried about a potential overheating in their property market.

Challenging as it may be to manage, having diverse opinions can only be a good thing. It seems to be lacking here.

An argument has been made that SA, with its stagnant economy and inflation under control, was more in need of an injection of monetary stimulus. Outside of the political debates, there were surely some compelling reasons for a cut.

The Bank adjusted its inflation forecasts slightly lower, and downgraded expectations for economic growth in 2020 and 2021. Actual inflation is well entrenched at or below the midpoint of the 3%-6% target range, though longer-term expectations have yet to catch up. With an economy that’s set to grow just 0.6% in 2019 and no more than 1.8% in the following two years, surely a case could have been made for lower rates.

There are also good reasons why a person making such a point would have lost the argument, but the disturbing part is that nobody in the monetary policy committee (MPC) seems to have dissented. It’s possible that they did but we won’t know because the Bank doesn’t release minutes of its deliberations, so we can only go on the voting results.

Kganyago is widely assumed to be an inflation hawk — not a bad thing for a central banker — but the unanimous nature of the discussion raises questions about the robustness of the debates within the MPC.

It might raise questions about whether the governor is too dominant and whether the other members are sufficiently independent.

And if they are all genuinely in agreement, it might also raise questions about the make-up of the committee and whether there’s enough diversity of thought.

The Bank’s website is strangely out of date, describing the MPC as having seven members when in reality it’s only five: Kganyago, his three deputies Fundi Tshazibana, Kuben Naidoo and Rashad Cassim, as well as Christopher Loewald, the head of the policy development and research department.

On its website, the central bank talks up the importance of having a committee with differing opinions.

“Not one central bank has replaced a committee with a single decisionmaker, a fact that has both theoretical and empirical support; the ability to draw diverse viewpoints from constituent members in committees ensures that there is likely to be some moderation of extreme positions and policies and more even policymaking,” it says.

Having said that, it still hasn’t moved to close the gaps that were created by the departures of Brian Kahn in 2018 and former deputy governors Francois Groepe and Daniel Mminele in 2019.

The leadership changes haven’t addressed the fact that the committee now has fewer voices.

While not as urgent as the need to find replacements for Groepe and Mminele, which was belatedly done by a government distracted by internal politics in the ANC, the Bank surely needs to address this deficiency.

Seven voices, depending on the individuals appointed of course, will make for more robust discussion.

Perhaps having a couple of extra people wouldn’t have made a difference.

The decision to keep policy unchanged, especially as the attacks on oilfields in Saudi Arabia highlighted the risks of global market volatility for a small oil-importing country such as ours, made sense.

In the next few weeks there’s the small matter of the government’s medium-term budget policy statement and a possible review of our credit rating by Moody’s Investors Service.

Perhaps it wasn’t the best time to cut rates. It’s just surprising that there wasn’ ta single voice making an argument to the contrary within the MPC.

IF THEY ARE ALL GENUINELY IN AGREEMENT, IT MIGHT ALSO RAISE QUESTIONS ABOUT THE MAKE-UP OF THE COMMITTEE