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