Baffling, disappointing and frustrating, in equal measures.
That is the only way to describe the decision by the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) to cut interest rates by 50 basis points last week, bringing the total cuts for 2020 to 275 basis points and leaving the repo rate at 3.75%.
There is room, and a need, to cut more aggressively. The decision represents the MPC at its most hawkish, retreating into a shell of conservatism at a time when the economy needs bold and courageous action. It also confirms, as if any confirmation was needed, that the MPC sees its role as being the narrow objective of taming inflation and are less concerned about economic growth and job creation.
The baffling aspect of this decision is that even if we accept that Reserve Bank’s role is to target inflation, the numbers in front of them point to room for and a need for more aggressive rate cut. Inflation is not a threat and will not be for some time.
The Reserve Bank now expects the economy t shrink by 7%, up from 6,1% from when they met in April. Even that seems optimistic with many economists now expecting between 10% and 12% of economic decline.
Inflation is expected to stay at the midpoint of the inflation target, or 4.5%, between now and at least the end of next year. The Bank expects the oil price to average $45 is 2021, meaning it poses no threat to imported. So why then is the Bank not cutting rates aggressively? If inflation resurfaces unexpectedly, they can raise rates as quickly as they would have cut them.
The biggest problem is that while the Bank anticipates that worse is to come from the public health dimension of Covid 19, they believe the worst is over economically.
“Economic contractions are expected to be deepest in the second quarter of 2020, with gradual recoveries in the third and fourth quarters of the year,” Kganyago said in the MPC statement. “The strength of the global economic recovery will depend in part on how quickly countries are able to open up for economic activity safely, and in particular how effectively societies comply with social distancing rules.” One can only hope that they are not woefully wrong.
The disappointing aspect of this decision is how the MPC voted on it. According to the statement, three members voted for a 50 basis points while two members voted for a 25 basis points cut. So no one felt a need to do more?
This brings to question the composition of the Monetary Policy Committee and whether it is time for this to be reviewed. The MPC currently consist of Reserve Bank Governor Lesetja Kganyago, his three deputies Dr Rashad Cassim, Fundi Tshazibana, and Kuben Naidoo.
They are then joined by Dr Chris Loewald, the Head of Policy Development and Research at the Reserve Bank who was appointed to the committee in June last year. Loewald spent years at the Treasury and was part of the team that drafted the inflation targeting policy, which was launched in February 2000. What the MPC has revealed itself to be is an eco-chamber of like minded thinkers whose only point of disagreement is how conservative they should be.
There was a time when the MPC had seven members. Maybe its time to return to that and have people with alternative perspective serve on the committee.
It might also help to have one or both of the additional members not be an employee on the Bank and only serve on the MPC. An economist like Chris Malikane comes to mind in filling this role. His Ph. D is on monetary policy for a small, open economy and makes him suitably qualified to deliberate on these matters.
The frustrating aspect of this decision is that the South African reserve Bank behaves like the central bank presiding over an advanced economy where interest rates are already low.
The Reserve Bank’s internal model that is used a policy guide, the Quarterly Projection Model, forecasts two interest rate cuts of 25 basis points in each of the next two quarters for this year.
That would still leave the repo rate at above 3%, leaving plenty of room for cuts. Why keep this buffer when the economy needs a boost? Cuts of 25 basis points are for economies where the repo rate equivalent is sitting at below 1%, typically advanced economies, where rates are at or near 0%. Such small cuts are not for small emerging market saddled with poor growth even before Covid 19 struck and high unemployment.
Such timid action helps nobody. The problem with MPC is that it believes it has done enough with the cuts implemented thus far and the purchased of government bonds embarked on since late March.
This is both ludicrous and absurd. Another issue that is hardy discussed is another tool at the Bank’s disposal: Foreign Exchange Reserves.
In April, the South African Reserve Bank’s foreign exchange reserves rose by $108m (R1,9 billion) to $43,638bn (R774 billion) after falling by $2,194bn in March.
This is far bigger than the R 150 billion in reserves that the Unemployment insurance Fund had going into the pandemic. The question is why South Africa cannot use even a fraction of these reserves to shore up government response to the pandemic. Reserves are designed for such emergencies, if its not allowed then South Africa should lobby to have the rules otherwise what is the point of accumulating them?
On Monday, trade union federation Cosatu announced that it has written to Treasury to request workers to make special withdrawal from their pensions? But why should workers compromise their long term livelihood while the country sits on such reserves?
It is time to think outside the box.
Finally, the crisis has exposed the need to have more timely economic data. It is incredulous that this month, we are still reporting retail and manufacturing and tourism statistics from February, which data from march, the month of Sate of Disaster and start of the lockdown only coming out this week. Raymond Parsons of the University of the North West Business School notes that the MPC’s economic assessment suggests it would make for better decision-making about the lockdown exit strategy if, “in addition to the key daily public health updates, there could now also be consolidated regular economic reports, perhaps weekly.”
These reports could be updates by the National Treasury or Stats SA giving data on job losses, business failures and lost tax revenues to provide a balanced perspective around the successful management of COVID-19 in the months ahead.
But that is unlikely to sway this current lot, who seem detached from people’s daily suffering before and during this crisis. When the COVID-19 pandemic is over there will be heroes such as the health workers who stood at the frontlines and faced it head on.
There will also be villains such as those who called for opening the economy for their convenience without putting their own lives and those of their children at risk, instead sending the poor to the frontlines. Finally, there will be the South African Reserve Bank, which had the power to do more but simply refused to do so.