FINANCE Minister Pravin Gordhan's comments about monetary policy raise a myriad of issues. I have dealt with one - how badly he has handled the furore raised by the unions - in my column this week for Finweek. But another issue that cries out for attention is the confusion his letter to the Reserve Bank has created.
The letter is published on the bank's website. The confusion is ironic, really, since the letter is entitled: Clarification of the Reserve Bank's Mandate. Instead of clarifying, though, it has sown confusion.
One example of the confusion that now exists is the interpretation University of Cape Town economics professor Brian Kantor reads into the letter.
According to media reports, Kantor believed the mandate for the bank - as outlined by Gordhan in Budget documents and the letter - represented an implicit rebuke by the treasury of previous monetary policy (under former Reserve Bank governor Tito Mboweni). This was too rigidly focused on keeping inflation within the 3% to 6% target, regardless of the source of price rises and the effect on the economy.
Kantor said the "new" mandate, expressed in the letter, gave the bank more flexibility to consider factors such as growth, employment and the exchange rate when deciding on interest rates.
Firstly, Kantor is wrong in thinking there's a so-called new mandate. The letter simply states the Reserve Bank's constitutional mandate, and then "clarifies" it.
Implied criticism
Secondly, the Reserve Bank - even when it was hiking interest rates - always argued that it was flexible about inflation targeting. The leeway mentioned in the letter is nothing new, although Mboweni and Marcus may interpret flexibility differently.
But that is something that will depend on the governor in question, and not on any government "clarification".
The so-called clarification didn't say anything that Mboweni himself hadn't, even during periods of harsh criticism of what he was doing. It's the actions - the interpretation of flexibility - that count.
Kantor reads an implicit criticism of Mboweni for keeping interest rates too high into the letter. Taking a medium-term perspective, I can argue that there's an implied criticism in the letter that interest rates were cut too low in 2004 and 2005. (I have argued before in this column that those interest rate cuts were one of Mboweni's big mistakes, and that they propelled the economy into a credit bubble which he then pricked in the most painful of ways.)
My argument that this criticism is implied rests on the emphasis the letter places on the meaning of "balanced and sustainable economic growth". The letter first quotes the constitution: "The primary objective of the SA Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable economic growth."
It then goes on to say: "Balanced and sustainable growth requires the composition of growth to be such that it does not give rise to an unsustainable balance of payments (BoP) position [either surplus or deficit] or unsustainable debt burdens for the private and public sectors."
One could argue that the rapid deterioration in the current account deficit of the balance of payments from 2004 to 2005 was an early warning signal that interest rates shouldn't be cut further, as import demand shouldn't have been raised further by stimulating the economy.
Part dark arts, part hard numbers
One could also argue that the rate at which credit demand was growing at the time showed the economy was heading for an unsustainable private debt burden, and that this shouldn't have been encouraged further by cutting rates.
To be honest, I don't think this much thought went into Gordhan's paragraph I have quoted, but I make my argument to show that these things can be interpreted in different ways. For instance, Gordhan writes about the "BoP position" having a sustainable "surplus or deficit".
If one looks at the capital account of the BoP, it has been in surplus this year. Is it an unsustainable surplus? Would that question be answered by saying the rand is too strong? When talking about the "BoP position", is this a reference to the current account or the capital account?
The paragraph I quote - and it's only one paragraph in the letter - raises more questions than answers. How ironic that it forms part of a "clarification".
The trouble is that economics isn't an exact science, and monetary policy is part dark arts and part hard number crunching. Interpreting the paragraph I quote from the letter is the "dark arts" part of the policy.
Also, everything is open to interpretation. One person's sustainable BoP position is another's big problem.
Marcus may well turn out to be a different type of governor to Mboweni - with interest rates probably being less volatile.
But it won't be as a result of Gordhan's illumination of her mandate. The minister's "clarification" has just served to sow confusion about monetary policy.
- Fin24.com