South Africa

Leave the Reserve Bank alone – BER

Lesetja Kganyago

Top South African politicians, including President Cyril Ramaphosa and Finance Minister Enoch Godongwana, must act decisively to shut down the governing African National Congress’s “ill-advised” proposal to change the central bank’s mandate and manage risk perceptions in the lead-up to next year’s elections, the Bureau for Economic Research said.

The BER’s comments come after Gwede Mantashe, the ANC’s chairman, said the party agreed at a conference to change the central bank’s mandate to include job creation, a prospect that rattled investors worried that modifications would weaken the South African Reserve Bank’s independence and commitment to its inflation target.

Ramaphosa later played down suggestions that the change was imminent, and Godongwana said an explicit mention of jobs in the central bank’s remit wouldn’t affect its operations.

The central bank’s constitutional mandate is to protect price stability in the interest of balanced and sustainable growth. It has more than doubled the benchmark rate since November 2021 to 7.25% in response to the worst global inflation shock in a generation.

Though its stance has drawn criticism from some politicians and labor unions, South Africa hasn’t experienced target misses of the scale experienced by some of its African and developed-market peers, and interest-rate hikes haven’t been as large as in other emerging markets.

At 32.9%, South Africa’s official jobless rate is the third highest on a list of 82 countries and the eurozone monitored by Bloomberg.

The ANC, under the auspices of its 2012 National Development Plan, targeted an unemployment rate of 14% by 2020. Opinion polls show the party risks losing its national majority in the 2024 general election.

The proposal, which is “out of touch with the needs and realities of the South African labour market is convenient for politicians eager to shift the blame for poor economic performance,” and appears to be grounded in horse trading, and posturing in the context of internal divisions in the ANC rather than policy or institutional substance, BER Chief Economist, Hugo Pienaar and Malan Rietveld said in a note.

“This kind of thinly veiled political attack on the South African Reserve Bank is not without costs or risks,” they said. It’s important that politicians and technocrats at the National Treasury “push back firmly against any efforts to undermine the Reserve Bank and its contribution to macroeconomic stability”.

Even without a mandate change, persistent attacks on the central bank will unnerve investors and may require a more hawkish policy stance to shore up its independence from political influence and the credibility of its commitment to price stability, the economists said.

A change to the remit that doesn’t materially affect the implementation of monetary policy, in the long run, will still require a period of higher interest rates to reinforce the central bank’s independence and credibility and will make “future government appointments to the monetary policy committee even more critical as interpretations of the revised mandate would be heavily scrutinized by market participants,” they said.

A “nightmare” scenario, which would see the central bank’s mandate changed and several so-called pro-growth appointments to its leadership and MPC would dismantle the Reserve Bank’s hard-won credibility and independence and may seriously undermine price and overall macroeconomic stability, the BER said.

“Unlikely as this scenario is at this point in time, it could conceivably form part of a broader political realignment in South Africa, particularly through coalition arrangements between a declining ANC and radical political parties currently in opposition.”

While central banks such as the US Federal Reserve have dual inflation and employment mandates, that’s the exception rather than the rule and is also “somewhat of a red herring,” Pienaar and Rietveld said.

“Whenever a short-run trade-off between the inflation and employment components of the mandate needs to be struck, priority will naturally fall on the preservation of price stability.”


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