Photo: SA Reserve Bank Governor Lesetja Kganyago

Thebe Mabanga

And so, as expected, the South African Reserve Bank joined about fifty other Central Banks around the world in cutting interest as a mitigation measure against the devastating spread of the Corvid 19 virus.  

The Monetary Policy Committee unanimously cut the repo rate by 100 basis points to 5.25%.

Except of course, many of the Central Banks that have cut rates are presiding over much healthier economies while many others, from the United Kingdom to New Zealand, have had their actions complemented by stimulus packages by their governments.

None of these two conditions hold true for South Africa, which means the Reserve Bank needs to do more.

The most intriguing aspect of the Reserve Bank’s response is that its focus, inflation, is not a threat in the near future.

Nedbank points out that “price pressures are expected to moderate significantly on the back of the collapse in global oil prices.

CPI is expected to fall to 3.4% in the second quarter of 2020 before picking up gradually to 4.9% in the second quarter of 2021”.

Raymond Parsons, professor at the North Wets University Business School also notes that “the problem now in SA is not inflation but to focus on what it is necessary to do to sustain economic and business activity.”

Instead, the broader part of the bank’s mandate, growth and employment are both under severe threat, but the bank says nothing about how these will be impacted.

This suggests that the Reserve Bank still sees inflation as the key part of its mandate.

Kganyago now expects that South African economy to shrink by 0.2% in 2020, a number now deemed highly optimistic by anyone outside of the Bank, designed perhaps to calm nerves only to be revised upwards later.

At the 2010 Budget speech, then Finance Minister Pravin Gordhan gave then the Reserve Bank governor Gill Marcus a letter that broadened the bank’s mandate, in response to calls by the Left to do so.

“We have listened to South Africans carefully,” Gordhan said at the time.  

“We have evaluated what has been happening around the world and we believe that this new mandate of the Reserve Bank gives it the flexibility to manage inflation in a dispassionate way, not making it the sole focus of what it does and being mindful of both growth and employment in SA.”

Kganayago was present in that Budget lockup press conference as Director-General at National Treasury.

Yet now, like Marcus before him, simply eschew the broader part of this mandate and simply focus on inflation, which may now present a new problem of falling below 3%, the lower end of its target bracket.

Former SARB Governor and current Finance Minister Tito Mboweni could use the excuse that he had a narrower mandate of inflation-targeting and since the country had introduced the target in February 2000, he had to establish its credibility and stubbornly stick to his guns, raising rates even when circumstances dictated otherwise.

The Quarterly Projection Model, an internal modelling tool that the Reserve Bank uses as a policy guide, which predicts the path that interest rates are likely to follow, had projected that the Bank would cut rates by 25 basis points each in the second and fourth quarter of this year, and then again in the first quarter of 2021.

The MPC has simply brought forward all those cuts combined and added another one.

To do what you were planning to do much earlier than planned is neither genius nor brave.

What the SARB does for the remainder of they year will mark then out as brave.

A 50 basis point cut in the second and fourth quarter of the year to yield a total of 2.25% for 2020, seems like an appropriate response for these troubled times.

Kganayago, Marcus and Mboweni all exhibit the common quality of starting out as political appointments and end up being technocratic bankers, immersed in the bank’s conservatism and constrained by the language as contained in the glib, trite MPC Comminique.

Kganyago could have started yesterday’s first-ever virtual press conference by pointing out that “we meet in interesting times,” but instead launched straight into what has happened since the January meeting in a scripted format that is not supposed to spook markets.

If government wanted an insular, number-crunching technocratic governor, they could have over the last two decades appointed former deputy governors such as Renosi Mokate, Xolani Pallo Guma, or most recently, Daniel Mminele.

Mminele has instead been allowed to take up a cushy job at ABSA.

Kganyago and his predecessor’s role is to shield the technocrats and explain unpalatable decisions to voters but also start an internal conversation if he feels the Bank is out of touch with reality.

His current crop of deputies brings a blend of the political and the technical in Kuben Naidoo, who follows Kganyago from Treasury where he was head of the Budget Office; Rashad Cassim, who comes from academia and Stats SA before heading up research; and the brilliant Fundi Tshazibana, who worked at Treasury and the International Monetary Fund.

Kganyago took yesterday’s announcement to remind everyone that the Bank’s leadership has experience in managing crises starting with the Asian Financial Crisis in 1998, which caught South Africa with high inflation and high interest rates, the Argentina defaulting crisis in 2001 and the Global Financial Crisis in 2008, which found the Bank experienced in implementing its inflation-targeting mandate.

Interestingly, he did not mention the bubble burst of 2000, which required the skill of another Central Banker, Allan Greenspan of the Federal Reserve in the United States, to navigate.

It was during the repose to Argentinian crisis that Mboweni increased the frequency of the Monetary Policy Committee from quarterly to the current bi-monthly, and Kganyago sees the need to alter this arrangement to say monthly, although he has the option of an emergency meeting should circumstances dictate.

Kganyago and his deputies are surprisingly calm about the need for extraordinary measures to intervene in the bond or forex market in the months ahead by injecting liquidity.

They also do not foresee a need to relax the bank’s reserve requirements to help commercial banks deal with rising impairments or help distressed consumers through the crisis.

Finally, they do not expect to have to intervene to protect the rand.

So, it’s business as usual at the Bank during a time of crisis.

You can expect very interesting times ahead.


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