Grahamstown had the privilege of hearing one of the most powerful people in the country outline the difficulties posed by continuing global economic turmoil last week.
Grahamstown had the privilege of hearing one of the most powerful people in the country outline the difficulties posed by continuing global economic turmoil last week.
Among the audience addressed by the Governor of the South African Reserve Bank were academics, students, school pupils and financial journalists hoping for some clue about the direction of interest rates.
For it’s mainly whether interest rates will stay static, rise or fall, that galvanises financial journalists when Gill Marcus speaks. Producing a copy of her printed speech, the governor pointed out that she dare not talk off the cuff because her pronouncements are subject to intense scrutiny – to the extent how many times she uses certain words being counted as an indicator of what the Bank has in mind on rate moves.
For a change, journalists concentrated on Marcus’s description of the bleak economic outlook globally and domestically. That could be interpreted as leading to further interest rate cuts. Militating against a cut are inflationary pressures from higher oil and food prices and the decline of the Rand’s international buying power and therefore higher import prices caused by capital outflows.
The obsession with interest rate movements is understandable, particularly when they are on a rising trend as they were in the time of previous Governor Tito Mboweni. Over-examination of the topic can become tedious, and is part of a pattern of superficiality of news coverage of the role of the Reserve Bank.
On the one hand, I sympathise with reporters, because this is what people are interested in. In any case, central bank governors usually talk in what appears to the non-initiated to be a special code. Marcus is remarkably clear in her speeches, but the degree of prior knowledge needed to appreciate what she says is still quite high.
The head of a central bank dare not be too blunt: the background to the bank’s decisions has to be presented in the guarded, technical and dispassionate language of economics so that the bank can defend itself against accusations of acting on a whim.
Yet there is a lot more to the institution than interest rates. While the Reserve Bank has a narrow mandate, to protect the value of the currency in the interests of economic growth, it is the second pillar of economic governance in the economy, the other being the National Treasury. It is the guardian of the banking system and lender of last resorts for troubled banks.
To see just how powerful the Reserve Bank is, one need only cross the border to Zimbabwe, one of the world’s few laboratories of economic policy. One of its experiments, discarding central bank independence, has resulted in the country being forced to abandon its national currency, abdicate control of its monetary policy and lose its economic sovereignty.
Zimbabwe’s decision to rely on other currencies, namely the US Dollar and the Rand, for all transactions came after the country experienced the second highest hyperinflation rate in the world. The Zimbabwean Dollar, with notes of many trillions, became a curiosity. Hyperinflation was a direct result of the Zimbabwean Reserve Bank printing money to finance government spending.
In other words, an irresponsible and non-independent central bank can wreak havoc.
Yet the Reserve Bank, despite its increased commitment to transparency and despite its attempts to explain the reasons for what it is doing, is constantly under attack for policies that, the argument goes, has made the Rand too strong in foreign exchange terms and interest rates too high to foster the kind of economic growth South Africa needs.
Some of the criticism of Reserve Bank policy is reasoned, and represents the examination a powerful public institution should be subject to. Sometimes, though, the Bank attracts hysteria and not only when interest rates are moving sharply upwards in times of crisis. Bank rescues, which are the Reserve Bank’s job, can also be misunderstood, deliberately or otherwise, and disparagement of bank decisions can serve hidden financial agendas.
Marcus talked of how the global financial crisis had undermined trust, especially in banking, overseas. Money depends on trust too. Indeed it is a matter of faith. When will Zimbabwe regain trust in its central bank, so that it can once again introduce a domestic currency?
As a result of the Marikana shooting, the trade union leaders, sharp critics of the Reserve Bank, may now return to worrying about shopfloor issues like wages, rather than devoting so much energy to macroeconomic policy. Calls for a weaker currency will fade, as domestic turbulence ensures that the Rand, for a while at least, is weaker against other currencies.
Yet so prominent an institution will always be in someone’s sights, I suppose.
•The Reserve Bank funds the Centre for Economics Journalism in Africa, of which I am director.
