Credibility intact, Reserve Bank should now consider a rates cut

One of the biggest tests for emerging-market central bankers over the past few years has been maintaining credibility in the face of a strengthening US dollar and weakening domestic currencies in an environment of sluggish domestic growth. It’s an environment that has served to heighten pressure from political forces against any moves to tighten monetary policy to calm inflation, a natural consequence of depreciating currencies. For a political class now competing on the fast-paced social media playing field, a simple flick of an interest rate switch fits a simpler 140-character solution for a country’s economic ills. Selling structural reforms on such forums just doesn’t trend as easily. Tackling low growth rates, structurally high unemployment and rising inequality are matters in the main for fiscal policy.

In truth, the attacks on monetary policy custodians haven’t been an emerging-market ailment alone, and very few central bankers have been immune to the pressures of fast-paced politics.

Turkey’s president has at some point assumed the responsibilities of his central bank governor — and I use the word “his” deliberately. I’m not too sure he has fully relinquished these powers. US President Donald Trump has in more recent times also attacked the Federal Reserve for its monetary policy, claiming that it threatens the “economic miracle” his presidency has helped inspire.

SA’s central bank has been and still continues to be at the centre of some rather ill-considered political debate about its independence, with a certain faction within the governing party believing that only through its nationalisation will it be free from the clutches of monopoly capital. Unlike in other jurisdictions, where battle over the control of the bank has primarily been based on the use of monetary policy tools to stimulate markets and growth, the critics of SA’s central bankers seemed more inspired by the treatment of the first family, the Guptas.

In the face of the noise from policymakers too afraid to consider the necessary structural reforms, I would argue that SA’s central bank, more than most, has withstood the test and maintained its credibility.

Now that I’ve got that very long-winded compliment out of the way, I would like to speculate on what seems the very real possibility that the bank, under its conservative leadership, may just be in a position to cut borrowing costs at its next monetary policy meeting. I’d be first to admit that it would provide a short-term stimulus to the SA economy, but I’d argue that it would provide much-needed relief for an economy still struggling to shift into a more positive frame of mind.

With inflation now sitting at 4%, and below the middle range of the bank’s targeted inflation levels of between 3% and 6%, the bank’s monetary policy committee should consider a cut to rates for no other reason than to support an ailing economy.

There have been some rather significant changes to the macro-economic environment since the end of last year that may have just opened a window for the bank to reduce borrowing costs. Lower oil prices and a stronger rand have eased inflationary concerns.

The most significant change comes from the US Federal Reserve, whose four-year focus on raising rates in that country caused the dollar to strengthen against major currencies such as the rand. Our bad politics of recent years didn’t help, serving only to exacerbate rand weakness.

But with inflation failing to take hold in the US and growth forecasts that point to slower growth, the Fed isn’t as hawkish on rates. The change in sentiment has seen central banks in Australia and India cutting rates to boost their country’s prospects. The Bank of England has all but scrapped its plans to raise borrowing costs recently. With its credibility intact, here’s to hoping the Reserve Bank follows suit next month and at least an easing of monetary policy takes place in an environment in which fiscal policy seems to be returning to a more disciplined path.

Of course, one can always hold out hope for a 50-basis-point cut, however unlikely that may be.

Bank is at the centre of some ill-considered political debate