PETER ATTARD MONTALTO: Is the Reserve Bank a one-trick pony on inflation?

It is funny how myths stick around and fester. SA is of course full of them and they infect the discourse.

It was a sheer delight to see the reaction of our comrades on the left to the Reserve Bank’s stonking hike of 75 basis point (bps) last week. I thoroughly recommend everyone to read it. The idea is rehearsed that the monetary policy committee (MPC) is somehow lacking in flexibility and lacks credibility because it is hiking in response to a supply shock as inflation climbs with higher petrol and food prices. The Bank is labelled as “trapped because of its one-dimensional, and one trick pony response to inflation”.

This debate is appearing around the world, even in the leadership election for the Conservative Party. Some seem to want governments rather than central banks to manage inflation.

Of course, the drafters of the SA constitution knew full well that an independent central bank needed to safeguard to value the rand in the consumer pocket and hence that remains the core of its work. The idea that anything beyond minor clipping around the edges of inflation could be possible with a fiscus that has no space is odd. The fuel levy cuts — even if they were made permanent would have made only a 0.2 percentage point or so difference to inflation. If one dives down that burrow and wants a fiscus to start subsidising petrol or food say when there already is such a steep yield curve one can end up having even higher interest rates to compensate for the increased risks in the economy.

In reality the Bank may well be moving with a fair clip of speed but that should allow them to stop somewhat earlier and at a lower rate than otherwise would be the case by waiting and going in small clips. Verses history, if we see them stop even at 7% that is a moderate level.

The MPC has quite clearly taken on this narrative and talked about the impact of inflation on the poor.

The issue of course is that rate hikes are precisely meant to act through making money more expensive and so investment decisions have to be chosen more carefully and growth is curbed marginally. If one has to hike so much into “tight territory” then this may well be the case — where interest rates are well above long-term inflation. But interest rates are still below current inflation and now only just in line with where inflation is seen through the end of next year.

The MPC says it is only removing “accommodation” and so is still below neutral rates (though doesn’t really want to tell anyone where this is) rather than being in restrictive territory. This is not an uncontroversial statement given you are still tightening conditions by removing accommodation. Still, it implies less impact than would otherwise be the case.

As ever with myths — playing out the counterfactual is useful. A world where the MPC was keeping rates unchanged or increasing them by 25 bps only would be one where the real rates (the gap between policy rates and inflation) were getting more and more negative. Where would the signal be to inflation expectations, price setters and the currency?

The answer for some is that the government would step in but here are more myths. First that there is a mystical R400bn or so that can just be tapped if more money was given to the SA Revenue Service (Sars) to extract it. The Davis committee was always sceptical this was possible and it presupposes that the existing “missing” tax doesn’t react in turn through tax offshoring of individuals or companies and so on.

This is not to say that Sars’s return to efficiency and productivity won’t generate more tax revenue. But there is a myth around the order of magnitude here.

The myths peddled around the basic income grant debate are perhaps the most interesting.

Nowhere has there been more myths than the ANC — certainly to be stress-tested in the run-up to 2024. The “surprise” result this weekend in KwaZulu-Natal teaches us to be very careful about what one assumes about the party and that the line between myth and reality can be somewhere unexpected.

The other place that seems a magnet for myths is Eskom. Alternative realities swirl where the energy availability factor can be raised through mysteriously as-yet-tapped funds or talent (from where either comes from is never clear). Eskom is so interesting precisely because there are so many myth peddlers about with easy solutions.

With the country in something of a bind fiscally and with a need for solid, evidence-based policymaking to solve so many crises such as load-shedding, logistics, infrastructure, water and crime, we need to be constantly on the lookout and stress-test policy responses for myths.

Myths are perhaps inevitable as policy debates are on repeat and where the problems don’t change and yet there is a hunt for different answers. In this crucial year for reforms and politics this is more important than ever.

Be alert.

• Attard Montalto is head of capital markets research at Intellidex, an SA research-led consulting company. This article first appeared in Business Day.