'Leave Reserve Bank alone'

Johannesburg - There was no need to change the Reserve Bank's mandate as it already had the flexibility to pay attention to economic growth as well as target inflation, economists said on Monday.

They were commenting on the ANC and its leftwing alliance partners' decision at the weekend that an alliance task team "would remain seized with reviewing and broadening the mandate of the Reserve Bank".

Economists understood the decision to broaden the Reserve Bank's mandate to mean that its focus shouldn't just be on inflation and inflation targeting, but that it should also target economic growth. This focus on economic growth would take place through two mechanisms - the interest rate and the currency.

However, economists pointed out that the bank's constitutional mandate already required it to protect the value of the currency "in the interests of balanced and sustainable growth", so the growth requirement was already a part of the deal.

Nedbank economist Dennis Dykes said no one could accuse the Reserve Bank of being an overly strict inflation targeter, ignoring economic growth. "As we've seen in aggressive interest rate cuts in the first eight months of this year, the focus has been on growth. There's even scope for another cut in interest rates within the present framework of inflation targeting."

Dykes said if one started fiddling with the inflation targeting framework, the question that comes to mind immediately is why this should be done. "If the idea is to artificially stimulate growth through money creation, inflation would spiral," he said.

On the issue of changing the Reserve Bank's mandate to encourage it to take action to weaken the rand, Dykes said this was also not necessary. The bank could speed up the accumulation of foreign exchange reserves without any change to its mandate.

Stanlib economist Kevin Lings said he could envisage some tinkering with the inflation targeting framework that would see the Reserve Bank be more aggressive in cutting rates and less aggressive in raising them. But, on the whole, he didn't think there would be major change, as new Reserve Bank Governor Gill Marcus would reject that.

Lings also said it would be acceptable to tinker with the inflation target, given the massive shock that could come from electricity tariff increases. He said he would have no problem with it if electricity was excluded from the basket being targeted, or if the target range was adjusted marginally upwards. This might be necessary, given that inflation had already been outside the target range for two years.

But Lings agreed with Dykes that, on the whole, the inflation targeting framework was already flexible enough to accommodate a more growth-orientated monetary policy.

"This focus by the alliance on the Reserve Bank is detracting attention away from the real policy issues that need to be addressed, such as industrial policy and labour market policy. It's treating the symptom rather than the cause," Lings said.

Sanlam economist Jac Laubscher said trade federation osatu's call for interest rates to be cut to 3% didn't take into account the structural reasons why interest rates in SA needed to be higher. "We are a country with a very low savings rate and can't afford highly negative real interest rates," Laubscher said.

He also said the idea that low interest rates would bring about a weaker rand had not been proven.

- Fin24.com