Reserve Bank sticks to guns on rand rate
No nod for inflation targeting
November 22, 2009
By Donwald Pressly
Somewhat disarmingly the new governor of the SA Reserve Bank, Gill Marcus, underlined the point several times during her first briefing to MPs last week that the central bank could "never" intervene to achieve a particular rate for the rand.
However, she was more open to debate about extending the mandate of the bank which would imply that, when taking a decision on interest rates, more than just the inflation targeting concerns would come into play. But she did not spell out exactly what those new mandate elements could be.
In response to questions from the finance and appropriation committees of the two houses of Parliament, as to whether or not it had been appropriate to raise interest rates during the recession, the governor said commenting would be "inappropriate".
In a sense she answered another question: will the bank buckle to pressure from Cosatu to reduce interest rates which the union believes will fuel consumer spending and, therefore, promote economic growth? Having just retained the repo at 7 percent, the answer implied was that the bank would not artificially cut rates.
It inspired the new opposition man on the block, DA MP Tim Harris, to remark that this was an appeal to pragmatism "in the face of noisy pressure" from the alliance partners and also underlined the critical independence of the bank "and shows that the governor is off to a good start".
But he did warn that the monetary policy review showed that the governor would continue to come under "extreme pressure" to keep the price level stable - the internal value of the rand - as long as the government "persists with its mismanagement of the economy".
He noted that the government had a direct influence on administered prices, like electricity prices, and on hikes in public sector wages. Harris noted that in both these areas "they are passing on hugely inflationary costs that the governor will have to deal with using her only weapon: the interest rate".
He noted that the review showed nominal unit labour costs had sky-rocketed from the end of 2007 - which he dubbed the Polokwane effect in reference to the gaining of power by the Jacob Zuma group - to twice the upper inflation target limit even as labour productivity entered a deep decline.
"The left appear to be cashing in on the Zuma victory," said Harris.
The bank's senior deputy head of research, Brian Kahn, noted that the consumer price index inflation rate would rise significantly beyond its current level of 6.1 percent - and remain well above the targeted maximum of 6 percent - if Eskom were to increase electricity tariffs by 45 percent for each year for the next three years.
DA MP Marius Swart thus summarised it: the inflation rate could settle to within its target range were it not for the 45 percent hike.
However, in government circles the pendulum appears to be swinging against a 45 percent hike.
ANC secretary-general Gwde Mantashe last week suggested other funding options for Eskom's infrastructure build programme - such as development bonds or even coming in with independent power players. The cabinet reversed a decision to back a 45 percent hike.
But pressure on Marcus to cut interest rates fell on deaf ears. The governor did not respond to a remark that "a Christmas box" - a rate cut before the summer holidays - be provided.
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