Behind the scenes at a Reserve Bank interest rate meeting

The Reserve Bank’s Monetary Policy Committee (MPC) can take days to determine how to change interest rates in South Africa. The process is complicated and split into three distinct phases. 

This is markedly different from the assumed one day of deliberations between the six members as to what change should be made, if any, to interest rates based on inflation data. 

The MPC aims to determine the amount of money in circulation in the South African economy. This is done by setting the repo rate, which affects the financial sector’s borrowing costs and, through that, the broader economy. 

It is referred to as the repo rate because commercial banks give the Reserve Bank an asset, such as a government bond, in exchange for cash. The banks can then later repurchase (repo) that asset at a lower price, reflecting the interest they paid to have the cash. 

Banks then pass on this cost of borrowing from the Reserve Bank to consumers, reflected in the prime lending rate for home loans, car loans, and credit. 

Thus, when the repo rate goes down, it becomes cheaper for banks to borrow from the Reserve Bank and, thus, cheaper for South Africans to borrow from banks. This introduces more money into the economy, stimulating activity. 

Currently, a committee of six people determines monetary policy in South Africa. The ideal number is seven, but President Ramaphosa has yet to nominate a replacement for Kuben Naidoo, who resigned last year. 

The committee can never have a tie vote. Even with six people, if a 3-3 split emerges as a result of their deliberations, Governor Lesetja Kganyago has the tiebreaking vote. 

Kganyago is the head of the MPC, alongside his other roles at the bank, such as chair of the Financial Stability Committee. 

The other members include Deputy Governors Rashad Cassim, Nomfundo Tshazibana and Mampho Modise. 

Head of the bank’s Economic Research Department, Chris Loewald, and adviser David Fowkes are the other two members of the MPC. 

Former Deputy Governor Naidoo recently explained in a webinar with Efficient Wealth how the MPC makes its final decision.

Naidoo said the process evolved substantially since he joined the MPC in 2013, with it sometimes taking days of presentations before the committee even discusses potential interest rate changes. 

There are multiple parts to the process, with the first part being presentations from the departments in the Reserve Bank and some outside parties. 

“The research department will do a presentation on the state of the economy, and the markets department will do a presentation on how we see the financial markets at that moment both locally and globally,” Naidoo said. 

Sometimes, the MPC will also receive a presentation on the state of public finances and what is happening in the economies of the Southern African Customs Union (SACU) or the Southern African Development Community (SADC). 

The presentations take up to an entire day per department or party. Less frequently, the financial stability department will make a presentation. 

These presentations are then discussed with relevant parties, with questions being asked by the MPC and sometimes parties criticise each others presentations.

On rare occasions, the MPC may ask specific departments to do more in-depth analyses of specific sectors of the economy or on potential external shocks to the economy. 

This culminates in a discussion with around forty to fifty people from key positions within the bank regarding the presentations and South Africa’s monetary policy. 

The second part of the process is focused on modelling South Africa’s future economic performance, inflation, and potential interest rate levels. 

These discussions only involve the MPC and the modelling team of around ten people who present highly detailed forecasts, which are then discussed. 

Over the last thirty years, the Reserve Bank’s modelling has greatly improved, Naidoo said.

The MPC engaged with several models, the most important one being the quarterly projection model, which projects how the South African economy is expected to perform over the next ten quarters. 

Another key model is the so-called core model that outlines the economy’s performance over the next five years. 

There is also a REMA model that forecasts inflation that is much shorter-term than the economic models. 

The forecasting department will present all these models over a five to six-hour session, which is followed by a debate. 

This part of the process is typically kept to within a day and occurs relatively close to the Thursday on which the MPC presents its decision. 

The final part of the process is intense deliberations amongst MPC members regarding their stance on the Reserve Bank’s monetary policy and how they think it should change if it should change. 

“The next morning, the six members of the MPC sit alone, and we go through from the most junior to the most senior MPC member saying what our view on the economy and inflation is and what stance we’d prefer.” 

Naidoo was clear that this is not a vote, merely a presentation of personal opinions on the data the MPC has analysed in the preceeding days. 

The members will point out key issues they noticed in the data, for example, the strength of the dollar or a change in oil prices, and justify their stance. 

“This is not a voting process. It is a sort of a suggestion-making process that evolves into a discussion.”

The governor will outline his view last and say what he thinks the stance of te MPC should be. This is not final, with the discussion often continuing afterwards regarding the different viewpoints of members. 

Sometimes, this results in MPC members changing their minds and some sort of consensus being formed about the bank’s monetary policy and how it should evolve over time. 

At the end of the discussion, the governor would go around the table and ask the members what their final stance is. If there is a split vote, then Kganyago gets a tiebreaker vote as the governor. 

Prior to this, either the head of the research department, Chris Loewald, or David Fowkes would have drafted a “vanilla MPC statement” and then incorporate the stance of the committee into it after the decision is made. 

After lunch, the MPC will then go through this statement line by line for around three to four hours and agree on each sentence. 

This will be completed by the end of Wednesday, with the decision announced on Thursday at the press conference.