It seems clear that new Reserve Bank governor Gill Marcus has not yet brought anything of a different point of view to the
Monetary Policy Committee (MPC). The style was much more inclusive and open but the substance was largely the same as
before. She has deferred to the established positions of the MPC of which she is the only new member.
Therefore the sense held by the previous MPC that the economy is at a turning point and therefore needs no further
encouragement for fear of being too procyclical with interest rates (which have declined by 500bp has been maintained). Also
maintained is the concern with second round effects on inflation of electricity price increases – absent of which inflation would not
be regarded as a problem at all by the MPC.
The inflation problem is Eskom and interest rates remain where they are largely because of the Eskom effect on inflation. This
Eskom effect is creating great uncertainty and therefore is affecting inflationary expectations which are presumed to make ever
higher inflation inevitable, unless the Reserve Bank remains vigilant in setting interest rates accordingly.
Had I been at the Media Conference I would have asked this question. Does not the prospect of further electricity price increases
justify lower rather than higher interest rates given the impact of such price increases on domestic spending and therefore on
output and employment?
The answer that would have been provided would unfortunately probably have been something like as follows: no, because higher
inflation following such electricity price increases might lead to even more inflation – because of possible second round effects on
inflation.
That the MPC could still concern itself with second round inflation when the economy is as weak as it is and when the rand is as
strong as it is and when in the Reserve Bank’s view global inflation is not a threat at all to domestic inflation, speaks volumes about
the MPC’s lack of grasp of the causes and effects of supply side shocks on prices. But here nothing has yet changed with Ms
Marcus in the chair – which is the pity.
The right answer would have been yes – because Eskom’s price increase is a tax on consumers and tax increases lead to higher
prices and less spending and in the circumstances, while inflation will go up – profit margins will come down and employment
growth will remain subdued and so the economy will need some encouragement from monetary policy. Or in other words the
distinction between supply side shocks that drive inflation higher and demand led inflation should be emphasised by the
Governor. The Governor should make it clear that Monetary Policy can only be effective against demand led inflation and
monetary policy should not add to the demand reducing influence of higher levels of taxation.
Ms Marcus was also complacent about the negative growth in money supply and credit which other central banks have been very
active in trying, though not yet succeeding in combating. Again the MPC still does not wish to do anything to encourage SA banks
to ease up for the sake of the economy.
But this lack of action by the MPC was surely encouraged by a belief that the domestic economy is recovering. However such
predictions by the Reserve Bank were highly qualified as the quote from the MPC statement below indicates very clearly:
There are signs that the domestic economy will continue on its recovery path but economic growth is expected to remain below
potential for some time; and dependent to some extent on the pace of the global recovery, which still appears to be fragile and
uneven across regions. Economic growth is also expected to be constrained by subdued domestic consumption expenditure. The
domestic outlook for inflation remains favourable as a result of weak demand pressures and the main threat to the inflation outlook
emanates from possible electricity price increases.
We however see no signs of any meaningful revival in domestic spending. Reference was made to the particular unpredictability of
GDP growth this past quarter- of which preliminary estimates will be released next week. However marginally positive quarter-on-
quarter GDP growth may be recorded even as final consumption and investment demands decline. Improvements in net exports
and a reversal in inventory accumulation may yet allow GDP to grow even as final demand remains very weak. Even a modest
recovery in GDP growth would therefore not indicate the likelihood of the SA economy operating even close to its potential over
the next year – something that should concern the MPC greatly.
Should the Reserve Bank be surprised by the lack of economic recovery, it now only has its next meeting in January 2010 to
respond to it. We should not expect any emergency meeting before then and we should expect interest rates to remain on hold for
much of 2010. We can anticipate that a broader mandate for the Reserve Bank is in the offing that would allow it to concern itself
more with the growth outlook and less with the inflation outlook, especially when the inflation is supply side driven, as is clearly the
case now. We would welcome such a development as we would continue to support the independence of the Reserve Bank to act
as it judges – an independence that Governor Marcus will uphold determinedly.
