Pause for thought gives rise to jitters
THE path of virtue does not always run smooth. The policy dilemma which Reserve Bank governor Gill Marcus emphasised in her latest monetary policy committee (MPC) statement was having to balance the upside risks of inflation against the downside risks for economic growth — a tough one for South Africa.
In the end, the right decision was taken to leave the repo rate unchanged by an intriguing 4-3 vote in the MPC.
At its previous meeting in January, there was a 5-2 vote in favour of a surprise decision to increase the repo rate by 50 basis points. Because monetary policy decisions are ultimately a judgment call, there remains room for healthy differences of opinion and interpretation, especially on timing.
Monetary policy is still an inexact science, and we must beware of false precision or simple rules of thumb in making complex decisions.
Those economists who have been urging much higher interest rates, often humorously described as “sadomonetarists”, will be disappointed about the decision to keep interest rates on hold.
Marcus has stressed the up-cycle will be carefully calibrated and datadriven. Nonetheless, the warnings in the most recent MPC statement were clear that, depending on how the rand behaves in the months ahead and perceived global risks, future rate hikes were on the cards.
The “pause” button on interest rates may have been pressed for now, but the unmistakeable message was that the bank would eventually take the necessary steps to bring inflation back within the target range of 3%-6%.
Attention in recent central bank statements has understandably been taken up by the phasing out of quantitative easing in US monetary policy. We must remind ourselves not to panic about interest rates every time an external shadow crosses the path of our economic prospects, but to keep our powder dry for the big challenges that may still lie ahead.
In any case, markets are already pricing in the gradual normalisation of US monetary policy, and SA exports stand to gain from better news about the US economy.
We must get to the stage where, by steadily addressing the vulnerabilities that have put SA in the “fragile five” club of emerging economies, we slowly become less buffeted by what Janet Yellen does at the US Federal Reserve.
Given the inflation-targeting model used by the bank, if the inflation outlook deteriorates, interest rates will rise in future, despite the current holding pattern.
What concerns some economists and business people is that the model does not discriminate between cost-inflation, which is what the economy is experiencing, and demand-inflation, popularly known as “too much money chasing too few goods and services”.
No one thinks there is an “inflationary gap” in SA, and the bank says instead that the “output gap” is widening. The proper object of dearer money should be to check an incipient boom, not to further depress sluggish business.
The central bank has nonetheless consistently and diligently outlined markers about the possible future trajectory of interest rates, given its economic readings. Yet its decision to leave the repo rate unchanged for now seems to have perversely created unease among many business people and consumers about what could lie ahead.
What needs to be communicated more credibly is why, in a year in which the economy will be lucky to grow at 2.5%, borrowing costs may still have to rise.
What the bank should aim to avoid in two years’ time is a case of “the operation was a success, but the patient died”.
Monetary policy will continue to be impaled on the horns of painful policy dilemmas, with all that this implies for other key socioeconomic challenges in SA.
But just as the bank may have to refine its economic model to accommodate cost-inflation, so major policy decision-makers need to accept that relying on monetary policy for solutions is a chimera.
Parsons is a professor of economics at North-West University and special policy adviser to Business Unity SA