WHEN Finance Minister Pravin Gordhan used the budget review last month to spell out the Reserve Bank's mandate, he insisted that it was a change from the previous status quo. Market analysts disagreed, saying there was nothing new. Now Reserve Bank governor Gill Marcus also says there's nothing fresh in what Gordhan gave her.
But, after last week's surprise 50 basis-point cut, the question is has SA's monetary policy undergone a fundamental change? If yes, who should we thank (or blame) - Marcus or Gordhan?
In its section on monetary policy and inflation targeting, the budget review said: "In exercising [its] mandate, the Reserve Bank will continue to pursue a target for consumer price index [CPI] inflation of 3% to 6% in a consistent, transparent and flexible manner. The existing framework allows for a temporary deviation of inflation from the target in event of shocks over which monetary policy has no control.
"The time frame for adjusting inflation back to within the target range should avoid unnecessary instability in output and interest rates, and should consider factors that affect the attainment of balanced and sustainable growth.
"These factors include the business cycle [and whether growth is above or below the economy's potential], credit extension and asset prices, labour market developments, and the stability and competitiveness of the exchange rate."
Sorry for Gordhan, but there's nothing new in these factors. What's different is the way in which Marcus is interpreting her mandate.
The 'f' word
The key to understanding SA's monetary policy lies in the word "flexibility". SA has an inflation targeting framework which sets a numerical range for inflation, but this range can be pursued flexibly. That has always been the case. But the point is that the word flexible is open to different interpretations.
Was Marcus' predecessor Tito Mboweni being flexible when he raised interest rates by 5.5 percentage points between June 2006 and August 2008 - especially given that the main drivers of inflation were world prices for food and fuel?
Many argued that he was being highly rigid; Mboweni himself endlessly countered that this was not the case, because the medicine could have been infinitely worse.
As a result of Mboweni's rate hikes, household consumption expenditure started falling in the third quarter of 2008 and only showed positive growth again in the fourth quarter of 2009.
Marcus has been flexible in the way in which she has implemented policy. True, inflation will be below 6% this year and next year. But 6% isn't the target - it's 3% to 6%. If SA were a strict inflation targeter, the Reserve Bank would have set its sights on the midpoint of the target range: 4.5%.
According to the monetary policy committee (MPC) statement, CPI inflation is expected to average 5.3% this year and 5.4% next year, and to reach a low point at an average of 4.9% during the third quarter of 2010.
So, there's no question of inflation remaining at the midpoint for a sustained period of time. Strictly speaking, SA is missing the target.
Dangers of easy money
The trouble with implementing inflation targeting flexibly is that it makes for unpredictability. I deal with this in my column this week in our sister publication Finweek. But one question that still needs to be answered is why most people thought it would be wrong for Marcus to cut rates again.
The trouble with this is that it creates a psychology of easy money. It risks repeating the mistakes Mboweni made when he cut rates in 2004 and 2005, creating the conditions for a credit bubble he later had to prick very painfully. (Mboweni was amazingly inconsistent in his application of monetary policy, overshooting on the way down and again overshooting on the way up. No wonder Gordhan put consistency into his restatement of the bank's mandate!)
The other factor is that the left, including trade federation Cosatu, has been calling for easy money and there's a danger that it will see Marcus as its champion. To change that image, she needs to bolster the anti-inflation language of the MPC statement.
True, she has in comments after MPC meetings said that the aim of all central banks is to fight inflation. But she has yet to make her hatred for inflation clear in an official statement or speech. So far, the emphasis has been on weakness in the economy and the strength of the rand.
I's time for Marcus to shore up her anti-inflation credentials, even if it's only with some hard talk. She must resist the temptation for more interest rate cuts, which would mean she isn't only being flexible, she is, in fact, soft on inflation.
It's time for Marcus to talk the talk of a central bank governor. And, in nine to 12 months' time, it will become time for her to follow words with action with an interest rate hike.
- Fin24.com