TAR­GET­ING

The Re­serve Bank’s man­date to en­sure price sta­bil­ity is key, in­sists the Re­serve Bank gov­er­nor SA in­fla­tion tar­get ane in­ter­na­tional com­par­isons

CityPress - - Business - JUSTIN BROWN justin.brown@city­press.co.za

In the event of any ad­just­ment to the SA Re­serve Bank’s in­fla­tion tar­get range, we should see the tar­get nar­rowed rather than widened, said bank gov­er­nor Lesetja Kganyago on Fri­day. “The dis­course has to be able to bring in­fla­tion down. Higher in­fla­tion re­sults in higher costs in terms of output and em­ploy­ment,” he said. “Are you go­ing to do it [change the in­fla­tion tar­get­ing range] in the mid­dle of a re­ces­sion? You are go­ing to do it at an ap­pro­pri­ate time.

“Many times there isn’t a best time to do it. The Brazil­ians seem to feel that they can do it now, de­spite in­di­ca­tions that they might fall back into re­ces­sion,” Kganyago said.

“Is it a thing you must do now? I don’t think so,” he added.

Cur­rently, the cen­tral bank sets its tar­get to keep an­nual in­fla­tion within a range be­tween 3% and 6%.

Ear­lier this week, Deputy Fi­nance Min­is­ter Sfiso Buthelezi spoke at an event hosted by the Gor­don In­sti­tute of Busi­ness Sci­ence in Jo­han­nes­burg, say­ing there should be a de­bate about whether in­fla­tion tar­get­ing was still ap­pro­pri­ate.

“We set this 3% to 6% tar­get then, un­der dif­fer­ent eco­nomic con­di­tions,” Buthelezi said. “Is it a pol­icy for all sea­sons?” Buthelezi de­clined to in­di­cate what in­fla­tion range he would sug­gest when City Press ap­proached him af­ter the event.

Brazil has just re­duced its in­fla­tion tar­get from 4.5% to 4.2%, and will fur­ther re­duce this fig­ure to 4% by 2020, Kganyago told City Press dur­ing an interview at the Re­serve Bank’s head­quar­ters in Pre­to­ria.

South Africa’s in­fla­tion tar­get range is al­ready among the widest in the de­vel­op­ing world.

Kganyago pointed out that since the im­ple­men­ta­tion of in­fla­tion tar­get­ing, in­fla­tion had de­clined as in­ter­est rates had tracked in­fla­tion lower. This, in turn, caused higher in­vest­ment, which led to higher eco­nomic growth. “It is a no-brainer,” he added. “No amount of scream­ing at the Re­serve Bank is go­ing to get the po­ten­tial growth rate higher. But mone­tary pol­icy does ef­fect the growth in the cy­cles.

“What of poverty and un­em­ploy­ment? The poor do not own as­sets that can pro­tect them from in­fla­tion [un­like the rich, who own as­sets such as shares, prop­erty and off­shore as­sets]. Nei­ther do they have the abil­ity to shift their in­come,” said Kganyago.

“Do not un­der­es­ti­mate the in­tel­li­gence of the poor. They can see that in­fla­tion erodes their buy­ing power.”

Let­ting in­fla­tion get out of con­trol would ul­ti­mately in­flict a “mas­sive im­pact” on output and em­ploy­ment, he added, cit­ing Zim­babwe and Venezuela as ex­am­ples.

“We be­lieve that [in­fla­tion tar­get­ing] is sound. We do not be­lieve it is good for all sea­sons,” he said.

There were times when shocks to the econ­omy caused in­fla­tion to rise, which had a costly ef­fect on eco­nomic pro­duc­tion, he added.

“That doesn’t mean we don’t do any­thing to bring in­fla­tion down. But we have to do it over a longer pe­riod of time, so the cost of lost output is not as mas­sive.”

This is why the Re­serve Bank’s in­fla­tion tar­get­ing frame­work has an es­cape clause that al­lows for “flex­i­ble in­fla­tion tar­get­ing”.

Buthelezi’s re­marks come hot on the heels of Pub­lic Pro­tec­tor Bu­sisiwe Mkhwe­bane’s rec­om­men­da­tion in a re­port on Absa’s 1992 ac­qui­si­tion of bailed-out bank Bankorp that the coun­try’s Con­sti­tu­tion be changed to al­ter the role of the cen­tral bank.

ANC sup­port­ers cite Absa’s ac­qui­si­tion of Bankorp as an ex­am­ple of state cap­ture un­der apartheid. This they com­pare to the cur­rent ac­cu­sa­tions around state cap­ture in­volv­ing the Gup­tas, who have been con­sis­tently as­so­ci­ated with al­le­ga­tions of ex­ces­sive and un­due gov­ern­ment in­flu­ence, rack­e­teer­ing, bribery and cor­rup­tion.

Mkhwe­bane recommended that Absa pay back R1.25 bil­lion re­lated to the Bankorp trans­ac­tion.

On Fri­day, Absa filed court pa­pers chal­leng­ing Mkhwe­bane’s rec­om­men­da­tion.

Sec­tion 224 of the Con­sti­tu­tion lays down the Re­serve Bank’s pri­mary ob­jec­tive as be­ing “to pro­tect the value of the cur­rency in the in­ter­est of bal­anced and sus­tain­able eco­nomic growth”.

“You need price sta­bil­ity for bal­anced and sus­tain­able eco­nomic growth,” said Kganyago.

How­ever, Mkhwe­bane recommended that the Re­serve Bank’s pri­mary man­date be changed to the fol­low­ing: “To pro­mote bal­anced and sus­tain­able eco­nomic growth ... while en­sur­ing that the so­cioe­co­nomic well­be­ing of the cit­i­zens is pro­tected.”

This week, the cen­tral bank filed court pa­pers re­quest­ing that Mkhwe­bane’s rul­ing be set aside.

Kganyago said: “The Pub­lic Pro­tec­tor’s re­port hasn’t taken away the in­de­pen­dence of the Re­serve Bank. As we say in our court pa­pers, we do not be­lieve she has the power to or­der Par­lia­ment to change the Con­sti­tu­tion.

“What have we learnt from the drafters of our Con­sti­tu­tion is that they knew that when things are dif­fi­cult and dif­fi­cult po­lit­i­cal decisions must be taken, de­ci­sion mak­ers look for some­one else to take some other de­ci­sion and take away from the dif­fi­cult de­ci­sion.

“So, we have dif­fi­cult decisions to make in terms of struc­tural re­forms and in­creas­ing the po­ten­tial growth rate of the econ­omy. Out of nowhere some­body thinks, ‘Let us change the man­date of the cen­tral bank so that we can do all of these other things.’

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