Mboweni in­con­sis­tent

‘Guns blaz­ing’ fo­cus on GDP comes a year too late

Finweek English Edition - - Economic Trends & Analysis -

RE­SERVE BANK GOV­ER­NOR Tito Mboweni has to make up his mind on how inflation tar­get­ing should be im­ple­mented – if at all. His most re­cent com­ments on mon­e­tary pol­icy have been to­tally in­con­sis­tent with his spir­ited de­fence of inflation tar­get­ing last year and his gen­eral at­ti­tude at that time.

Mboweni sur­prised jour­nal­ists when he said at the me­dia con­fer­ence af­ter the Bank’s Mon­e­tary Pol­icy Com­mit­tee (MPC) meet­ing this month that he’d come out “guns blaz­ing” for an in­ter­est rate cut of 200 ba­sis points. Cooler heads pre­vailed and the MPC opted for a 100 ba­sis point cut in the repo rate, bring­ing SA’s prime over­draft rate to 14% from its high of 15,5% reached be­fore the rate­cut­ting cy­cle started.

But Mboweni’s guns are still blaz­ing. In an in­ter­view with CNBC Africa, he said: “There’s go­ing to be data com­ing out to­wards the end of Fe­bru­ary… if that data in­di­cates the MPC must meet, we might ac­tu­ally meet be­fore the next sched­uled meet­ing.” That sug­gests a fur­ther 100 ba­sis points cut, which could be fol­lowed by an­other one af­ter the MPC’s sched­uled meet­ing in April.

It’s clear Mboweni is very wor­ried about SA’s gross do­mes­tic prod­uct growth. Many economists be­lieve SA’s econ­omy had neg­a­tive growth in fourth quar­ter 2008. It’s the release of those GDP fig­ures that Mboweni re­ferred to in his com­ment to CNBC Africa.

No­body can ar­gue with the fact that Mboweni should be wor­ried about GDP growth. Al­though SA’s cen­tral bank’s man­date is to pur­sue price sta- and even at the meet­ing be­fore, he wouldn’t now have to be in such a hurry to bring rates down. It’s cru­cial to note the in­ter­est rate cy­cle is prob­a­bly a greater rea­son be­hind SA’s eco­nomic woes than the in­ter­na­tional eco­nomic re­ces­sion. True, man­u­fac­tur­ing and min­ing are af­fected by the global econ­omy. But a less re­stric­tive mon­e­tary pol­icy stance last year would have helped man­u­fac­tur­ers by cre­at­ing lo­cal de­mand. In ad­di­tion, the re­tail sec­tor has been in re­ces­sion, with mo­tor ve­hi­cle sales es­pe­cially in dire straits.

Last year Mboweni seemed im­per­vi­ous to the calls on him to bear in mind what his poli­cies would do to GDP growth. This year he’s changed tack com­pletely. De­spite an inflation fore­cast that isn’t overly bullish, he’s “guns blaz­ing” on in­ter­est rates. bil­ity – that is, to fight inflation – in prac­tice it has to keep an eye on eco­nomic growth. There’s no point in killing off inflation if the medicine also kills off the pa­tient.

That’s an ar­gu­ment used re­peat­edly in the first half of last year as Mboweni raised in­ter­est rates to coun­ter­act inflation that was mainly the cause of ris­ing food and fuel prices. Some economists then ar­gued Mboweni was go­ing in for overkill and that his zeal­ous­ness in fight­ing inflation would lead to a high cost in GDP growth.

It’s open to de­bate when Mboweni should have stopped hik­ing in­ter­est rates. But the de­bate was at its fiercest in the run-up to the MPC meet­ing in June 2008. At the time, a news agency re­ported: “Gov­er­nor Mboweni said …that the task of the cen­tral bank is to main­tain inflation in the 3% to 6% tar­get band and, with CPIX inflation now at 10,4%, ‘dras­tic’ mea­sures are re­quired. He said he and his col­leagues had dis­cussed the im­pact on the econ­omy of rais­ing by 200 ba­sis points.”

As it hap­pened, the repo rate at that June meet­ing was only raised by 50 ba­sis points and Mboweni ac­cused the re­porter of mis­quot­ing him by get­ting the words “prob­a­ble” and “pos­si­ble” mixed up. What­ever hap­pened, it was a clear case of bad com­mu­ni­ca­tion with the mar­kets by the cen­tral bank’s gov­er­nor, as well as a sign of an overly gung-ho at­ti­tude to­wards in­ter­est rate hikes.

If Mboweni had lis­tened to the voices at the time cau­tion­ing him against tak­ing the repo rate higher and had de­sisted from hik­ing in June last year,

The Bank fore­casts inflation to dip be­low the 6% level in third quar­ter 2009 but to rise above that level again in first quar­ter 2010. The MPC state­ment says at the “end of the fore­cast pe­riod” inflation is ex­pected to av­er­age 5,5%. That’s very close to 6% and far off the 4,5% that should be tar­geted if Mboweni was fol­low­ing his man­date to the let­ter.

No­body in his right mind would sug­gest Mboweni should fol­low his man­date to the let­ter, but his re­fusal to ac­knowl­edge the im­por­tance of GDP last year is in stark con­trast to his strong fo­cus on it this year. That makes for in­con­sis­tent mon­e­tary pol­icy and bad com­mu­ni­ca­tion with both the mar­kets and the pub­lic.

Threat­ened a 200 ba­sis point hike last year. Tito Mboweni

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