DURBAN – Since South Africa adopted an inflation-targeting policy regime in 2000, there have been growing concerns the SA Reserve Bank is being rigid with its sole focus on price stability – inflation control.
The chorus of disapproval of the policy regime becomes loudest when the benchmark interest rate is raised, particularly in the midst of weak growth and high unemployment rates. The leading trade union federation, Cosatu, is the most vociferous in its objection to inflation targeting.
For its part, the bank has always been quick to remind critics that its mandate is set out in the Reserve Bank Act of 1989 as:
"The primary objective of the bank shall be to protect the value of the currency of the Republic of South Africa in the interest of balanced and sustainable economic growth in the Republic."
Maintaining price stability is largely consistent with the objectives of most central banks in developed and emerging market economies. For instance, the Reserve Bank of New Zealand and the Bank of England identify monetary and financial stability as key objectives. In the case of Singapore, which doesn’t have a central bank per se, the objective of the country’s Monetary Authority is to ensure price stability that supports sustainable, stable economic growth.
One of the few countries that has a central bank with a broader mandate is the US.
The Federal Reserve Board Act states that its job is to “maintain long run growth” with a view to increasing production so as to promote the goals of maximum employment, stable prices, and moderate long-term interest rates.
I would argue that this brief works for the Fed. But it wouldn’t work for a small open economy like South Africa. Any attempt to push the SA Reserve Bank (Sarb) to explicitly target output growth and full employment, in addition to its objective of ensuring price stability, would be a recipe for disaster.
I’m also of the view that demanding a review of the inflation targeting framework is akin to barking up the wrong tree. South Africa’s anaemic economic growth and incredibly high unemployment can’t be fixed by monetary policy alone. Sarb’s role in directly influencing economic growth is acutely limited. Cutting or raising interest rates can only do so much.
In the present scheme of things, monetary policy tools – such as raising or cutting interest rates – have reached their limit. It’s fiscal policy – decisions by National Treasury to increase spending, raise taxes – that requires attention.
Thinking outside the box, as Finance Minister Tito Mboweni suggests, requires a profound shift from the old approach to economic management.
– The Conversation