Last week’s announcement by Reserve Bank Governor Tito Mboweni that the Net Open Forward Position (NOFP), or apartheid dollar overdraft, has been closed is more than just a feather in our fiscal manager’s cap at the National Treasury and Reserve Bank.
It also more than just narrows the scope for rand volatility, thus making the rand stand on its own on the country’s economic fundamentals. But reduction in rand volatility, just like inflation targeting, becomes a tool that Mboweni must be given more ways to use.
Ahead of last week’s monetary policy committee meeting, Statistics South Africa reported that gross domestic product (GDP) had grown by a depressingly small 1,9% last year, and that inflation had unexpectedly risen to 4,2% in January.
In announcing no change in rates, Mboweni did not make any direct mention of poor economic growth and the need to spur activity, but emphasised the risks to inflation and the continually growing demand for credit. This tends to make Mboweni appear indifferent to the plight of the poor. It then reinforces the perception that inflation targeting, and Reserve Bank caution, is anti-growth.
Lumkile Mondi, chief economist at the Industrial Development Corporation, said before last week’s interest rates decision that there is room in the economy for a two percentage point rate cut. This week he maintained that stance, noting last week’s GDP figures and this week’s news on the NOFP closure should have outweighed the inflation blip and brisk growth in credit demand and persuaded the Bank to cut rates.
But Mondi notes that Mboweni’s limitation has been his mandate. His boss, Minister of Finance Trevor Manuel, has to allow him to use his tool for other purposes. He suggested in the Mail & Guardian last month that Mboweni’s mandate should include economic output and inflation.
To be sure, inflation targeting has been both good and necessary. It has instilled discipline in the national psyche around inflation, and galvanised and focused a nation in pursuit of what was meant to be a common goal. In the period since, there has been a general acceptance by all stakeholders of its importance. The possible exception is labour, whose expectations in the quarterly Bureau for Economic Research survey remain higher than those of business and households.
Yet, last week, I felt that Mboweni could have cut the rate and risked inflation acceleration to spur economic activity, just as long as inflation stays within the target band. In anticipation of economic growth, another option over the long term is for the Treasury to move the inflation target band to, say, 5% to 7%. This was suggested by Standard Bank economist Iraj Abedian last year and Mboweni dismissed it as ”Iraj using information that is not in the Treasury or the Bank”. That does not help.