Bank a vital anchor in rough political and economic seas — Raymond Parsons

AT A time when many South African public institutions are under attack, we should be reassured to have the South African Reserve Bank as an anchor in the troubled period through which our economy is passing.

In the Bank, we have a semi-independent institution within the state, with prestige, historical tradition and international credibility, and at arm’s length from the wayward influences of politics.

Yet it came as no surprise when, hard on the heels of the decision by the Bank’s monetary policy committee to again raise interest rates by 25 basis points, calls came from key political groupings, such as the Congress of South African Trade Unions and the Economic Freedom Fighters for the Bank to be “nationalised”. This may just be another ideological reiteration of a standpoint previously held by these structures about the Bank, but at the same time, they may also resonate more widely now given the uncertain economic times.

To the extent that the criticism of the Bank revolves on the continued existence of private shareholders, it needs to be acknowledged that only a handful of other central banks still have private shareholders, albeit with a circumscribed role.

The Bank’s governing legislation does not allow its shareholders to exercise ultimate control over the Bank, unlike an ordinary company. For this country, it may still be of value to stress this useful, but limited participation by the public, even though the ownership structure is not a determining factor in the Bank’s autonomy profile.

Given its public mandate, there is no question of the Bank being private sectordriven. The government, in effect, has a dominant presence in that it nominates several members of the board of directors, and the governor and deputy governors are appointed by the president. The governor is also board chairperson. The monetary policy committee’s role is insulated from the board. There is little left to “nationalise”, and the hybrid setup has worked well for SA. The Bank is “independent within the system, but not of it”. Given that its “independence” is entrenched in the Constitution, it seems the founding fathers had some deliberate purpose.

The fact that various parliaments have also given central banks their own legislation and objectives does imply they want them to transcend the preoccupations of the government of the day. Yet with the inflation target in SA being set by the Cabinet, the Bank has only “instrument independence”, a level of autonomy it shares with many other central banks. Of course, autonomy is no guarantee against mistakes in monetary policy. The experience of being wrong is salutary and no central bank should be denied it. Indeed, few central banks have avoided it — not the European Central Bank, the US Federal Reserve, the Bank of England, the Bank of Japan, or the South African Reserve Bank.

Some economists (including half of the monetary policy committee) think the Bank is mistaken in being so hawkish about interest rates in the prevailing economic circumstances. But there is a vast difference between legitimate divergences of professional opinion about appropriate monetary policy and attacks on the role of the Bank that are often a proxy for other issues. Monaccountability etary policy decisions ultimately remain judgment calls by the Bank on the balance of risks, where there could be scope for different economic interpretations.

Checks and balances are the best insurance policy against disastrous errors. Institutional rules and practices that govern how central bank policy makers are selected, and how their preferences are aggregated, also remain salient, to outcomes and perceptions, for their decision-making. Should a central bank governor have the final say? Why have a monetary policy committee? One head or several? Most central banks rely on several heads to set interest rates that tend to have a better track record in decision-making.

In a democracy, the evolution towards central bank transparency strengthens its and promotes public understanding of monetary policy. By these standards, the Bank has done well. It is committed to strengthening transparency, economic signalling, research, accountability and “outreach” in the implementation of monetary policy. Monetary policy in SA has been predictable, if not always agreeable.

The monetary policy committee consists of the seven most senior Bank executives, chaired by the governor, who meet every two months to provide a policy setting for its mandate. At media conferences, the broad voting outcome on the committee’s decision is also disclosed. As there is a vacancy on the committee, the latest decision to increase the repo rate was taken even though the vote was 3-3. Usually, a tied vote means “no change”, so on what basis did it go ahead with its rate increase? The prospect of further rises must be driven by majority committee voting, as well as by the Bank remaining data dependent.

The fact that economic diagnosis is frequently uncertain also compels us to confront the question: what is the cost of being wrong? How can this be minimised in monetary policy? Near-unanimity among economists does not necessarily mean they are right, but it should be taken seriously if it is the result of constructive interaction.

Yet what is even more valuable to policymaking is an outcome achieved by effective reconciliation of conflicting opinions of experts offering different perspectives.

Bank of England analysts argue that one of the determinants of the success of British monetary policy has been the participation of outside experts. The US Fed also makes for inclusive participation and consensusseeking. Research suggests this adds value to central bank outcomes. External specialists may be premature in the South African situation, but it remains a possible future reform when circumstances are right.

Another hypothetical innovation could be, like the Bank of England and the US Fed, to publish edited transcripts of committee meetings. This increased flow of information is advantageous to better market understanding of, and response to, developments in monetary policy. In the meantime, foreign and domestic perceptions about the conduct of monetary policy in this country in the current economic situation, are more important. The Bank must retain its prestige and continue to have real power, otherwise it will not enjoy prestige.

The Bank is committed to strengthening transparency, economic signalling, research and accountability