Politics and the central bank are never a comfortable fit

03 February 2019 - 06:44 By Hilary Joffe

When the US Federal Reserve did a sudden turnabout this week, suggesting it had dropped plans for further interest rates this year, bemused economists inevitably asked whether the Fed was bowing to pressure from US President Donald Trump - who last year accused the Fed of "going crazy" by raising rates. The Fed held rates as expected but spoke a language that was much more dovish than before, emphasising the risks of slower global and US growth.
Its comments were a gift to emerging-market currencies, including the rand, which bounced to seven-month highs. But the market's volatile response illustrated one of the many dangers of attempts by politicians to interfere with central banks - which is that it can poison attempts to assess monetary policy decisions. Was this good or bad, based on the economics? It becomes hard to say when it's not even clear that economics, rather than politics, were the main driver.
Good monetary policy should be predictable and transparent, with central bankers giving appropriate guidance on their thinking. In the Fed's case, economists were as worried that the pressure the Fed was bowing to came from markets as they were that it came from Trump. The economics of interest rate decisions are hard enough to predict even when there are clear criteria for central bankers' decisions - and a great deal harder, creating a great deal more uncertainty, when they are not.
At home, our Reserve Bank is more likely to deal with pressure from politicians by making rates decisions that underline just how independent it is. The monetary policy committee cited heightened global risks to explain its split and somewhat controversial decision to raise rates in November, but one couldn't help wondering whether a necessary rate rise also served to make a mild political point.
The ANC may have shifted the goalposts in its January manifesto to focus on the inflation-targeting mandate itself - which it wants to see more "flexible" - rather than on nationalising the Bank. There have been firm and frequent affirmations of the Bank's independence and constitutionally sanctioned mandate from the president, the finance minister and the governor, but with the party continuing to speak with several voices, the politics rather than the economics of monetary policy have tended to dominate.
It's little comfort that SA has not been alone in this over the past year: India's central bank has come under relentless pressure from Narendra Modi; Hungary's central bank independence has been under attack; so too was Turkey's until its currency crashed and it had to hike rates to 25%. As in SA, cheaper interest rates are seen as the quick-fix solution to growth and jobs deficits. But as in SA, there's no quick fix.
Here, the endless round of indabas and consultations has highlighted in technicolour what the constraints, especially regulatory and bureaucratic constraints, are that weigh on growth, investment and job creation in almost every sector of the economy. The president's forthcoming state of the nation address will be closely watched for signs of measurable plans to address at least some of those.
Meanwhile, the Fed's surprise has made it harder than ever to work out what the world looks like and what the global constraints might be for SA's economic policymakers. Financial markets may favour emerging markets in a way they didn't last year, thanks to the Fed, but slowing global growth and ever more global geopolitical uncertainty (over everything from Brexit to China and the US) can only be bad news for the South African economy and others.
More reason for Ramaphosa to try and get the government and the governing party to focus on the growth and job creation they claim to want, as opposed to the other political (and rent-seeking) objectives that preoccupy many of them...

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