Marcus likely to keep her cool in the central bank's hot seat
November 2, 2009
By Ethel Hazelhurst
The debate around inflation targeting will acquire a new dynamic next week when Gill Marcus takes over from retiring Reserve Bank governor Tito Mboweni, who ends his 10-year term on Friday.
As is still the case with former finance minister Trevor Manuel, debates around Mboweni were quickly personalised.
While supporters of the two people responsible for implementing sound monetary and fiscal policy admire them for taking a tough stand in the face of opposition from the Left, trade union federation Cosatu has described both as "arrogant".
The personality at the helm of the central bank may be changing, but the debate will continue. Cosatu has already served notice it will "continue to argue for a shift in policy away from the government's narrow and inflexible inflation-targeting strategy, which led to the Reserve Bank raising interest rates when they should have been brought down, and reducing them too little and too late after the economy entered its recession".
The bank's repo rate was hiked by 5 percentage points, as inflation breached the ceiling of its 3 percent to 6 percent target range. The rate was subsequently cut by the same amount - though inflation remains just outside the range.
At a press conference ahead of his medium-term budget policy statement last week, Finance Minister Pravin Gordhan was asked for his view on the subject
His answer was ambiguous.
"Our inflation-targeting framework is an important element in macroeconomic co-ordination," he said. "It has assisted in lowering inflation expectations, and in preventing inflation from undermining our competitiveness."
But he added: "We recognise that alongside inflation reduction and financial stability, we must seek faster development and employment creation. I welcome public debate on this issue, and have agreed with the governor-designate, that monetary policy should also support our aim of balanced and sustainable growth."
From these comments it's difficult to predict the future of the present system of inflation targeting.
The target is set by the government in consultation with the central bank, and it can be reviewed. A case could be made for adjusting the existing 3 percent to 6 percent target range higher in view of the upward pressure on pricing that will come from Eskom price hikes - the state-owned utility has asked for three consecutive 45 percent increases in the years ahead.
Because electricity has only a small weighting in the consumer price index, the direct impact is limited; but the indirect impact is pervasive as electricity is a major input to most production processes.
However, some economists believe that altering a target in the face of inflation pressure undermines the credibility of the policy - which is critical to the efficacy of inflation targeting.
Clearly the subject will be high on the agenda of talks between the central bank and the treasury in the months ahead.
Gordhan spoke at the press conference of processes in place to allow for consultation between the two organisations. And he said these would be strengthened "to ensure South Africa is well served by the kind of co-ordination that is needed".
Whether Cosatu will be satisfied with the outcome remains to be seen. If not, the stand off between the central bank and the trade union movement may be repeated.
But perhaps not. Unlike Mboweni and Manuel, who are often irascible when challenged, Marcus always keeps her cool.
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