The South African Reserve Bank’s Biennial Research Conference in Cape Town continues talks for a second day now, as regional central bank governors and financial policy makers meet to discuss a new era of inflation-targeting regime. A panel of private sector experts sat down for a discussion to unpack industry’s role in this.
The South African Reserve Bank’s Biennial Research Conference in Cape Town continues talks for a second day now, as regional central bank governors and financial policy makers meet to discuss a new era of inflation-targeting regime. Earlier, a panel of private sector experts sat down for a discussion to unpack industry’s role in this. Let′s listen in for more. I think there was a lot of conversation yesterday, of course, about how you communicate when you′re outside the target range. But at this first stage, I think what′s very important is how you communicate if you keep rates on hold, while you′re forecasting, like the market, that you′re going to meet your target, you have a small negative output gap, you have restrictive monetary policy if you compare relative to neutral. So I think that′s part of where the focus is right now, is how do you justify that? I think in the last monetary policy statement, the addition of the detailed scenarios helped a lot. So to my mind, you′ve put a very plausible scenario, and you′ve quantified that in that scenario, it could add one percentage point to inflation, and then you can′t really be faulted for keeping rates on hold. But I do think how you take this forward and your actions from here, and how you communicate it, if you remain on hold without the risks playing out, will become important. There′s definitely a question among investors of, is the SOP already starting to target something lower? And like I say, I think for now, you′ve justified your actions, but how you take this forward will be important in that regard. Very uncertain global environment, for sure. Andrea, what′s your take? Yeah, I′m getting away, stepping back from maybe the last decision, just more conceptually. I do think the SOP is highly regarded, so I′m going to sort of support what Razia was saying earlier. It is seen as generally a pretty orthodox inflation target in our region, so I think that′s certainly a point that we can make quite strongly and with confidence. The comments we also come across from particularly offshore investors is the level of access that people get to the SOP is very unusual, specifically in an EM context, and I am going to continue using the word EM today. But in an EM context, the SOP does provide higher levels of access than is usual, and I think that speaks to the kind of transparency and credibility that it is very specifically trying to adopt in its communication strategy. In terms of, I think, examples of how well regarded the SOP has been, I mean, just have a look at the experience with the transition to the new monetary policy implementation framework. For an emerging market to come out and say that we′re going to go from a shortage-based system to a system where we′re going to flood the market with liquidity and for investors to take this quite well and for markets to respond quite well and for the transition to be as smooth as it has been, I think that tells you something about the respect and the faith that markets have in the bank. Another example was Jafekra, the level of communication and openness and access that we as market participants had to specific members of the SOP, very senior members of the SOP, with regards to that Jafekra reform, I think was very encouraging and very comforting. Lastly, I would say, if you were to split them out, and I think Mama Kete touched on this, if you were to split this out between equity investors and fixed income investors, I think fixed income investors think the SOP is great, wonderful, doing a great job, we understand the reaction function, it′s all about just calling the next move, but in general, no criticisms. Equity investors always want rates lower, like it doesn′t matter, rates must be lower. And that′s a frustration and that′s sometimes something that I have to personally have to spend more time explaining, the intuition behind decisions, the risks, etc. So there is this dichotomy between how the SOP is perceived depending on the asset class that you′re speaking to, and perhaps that′s something that happens in many other places, but it′s certainly what I find in South Africa. Great, thanks. So equity investors are problem children, we get that. Okay, so 4.5% is the midpoint of the target, and inflation expectations have gradually moved down to that level. Just reducing this a little bit, if that is our actual policy target, we want to see inflation expectations sitting at 4.5% over the medium term. It seems like we′re kind of getting this right, okay? So there′s a lot of uncertainty, but policy settings have achieved that kind of outcome. So how much weight do we put on being overly hawkish, Mamaketi? I mean, where does that come in, where does that feature? Is it a communication issue, or is it just, as you all said, that there are structural features of the financial markets that are always looking for lower rates, because it floats stock prices? How do we view this? How should we be viewing this? Yeah, so I was just having a conversation with the governor, actually, where he says the problem with financial market analysts is that sometimes we′re supposed to say what the SARB is going to do, but we want to overlay with that what we think the SARB should do. So it′s kind of like sometimes it′s what we think they should do, sometimes it′s what we think they will do. So I think when the situation is evolving, and that′s been very much a feature of the current moment, where you look at where inflation is coming out, where growth is coming out, I mean, those are the headline kind of indicators that you′re looking at, and you′re saying how is policy or the policy orientation or policy indications from the MPC changing relative to what is happening to the target levels, etc., and then you have a situation like we′ve had in the past year where inflation expectations have basically come down a lot. Growth has come in below expectations consistently, but the monetary policy stance in the short and in terms of as much as you can read the forward guidance hasn′t shifted, the question is what is it that drives monetary policy then. So I think there′s also the way the SARB talks about risks, which I think has been the case for the longest time, where there′s a weight attached to upside risk to inflation that seems to be quite a bit higher, so there′s an asymmetry when you think about risks. So upside risks are given a much bigger weight than downside risk, and the discussion of risk always feels like it′s one way, and that is, I think, a consistent feature of the SARB beyond even just now. So there seems to be a bias in the communication, there seems to be a bias in the communication around risk, there seems to be a lack of responsiveness at least now to low inflation, so there are the risk scenarios, et cetera, but there′s never an MPC without a risk scenario, and right now if one looks out for the next year with the administration that we have in D.C., it′s quite plausible that this is just going to be a permanent feature is risks. So to what extent are we going to weigh those against actual economic outcomes? So I think it changes, it′s very nuanced, it′s very subjective, and it′ll depend on the moment, but for the time being it does feel like the SARB is very hawkish. I would say that if I run a couple of Taylor rules using various weights, et cetera, the SARB has generally followed that, and so I think that would support the idea that actually the SARB′s actions is consistent with what it is supposed to do, so perhaps it is just that focus. It might also be the case that the SARB′s, of course, primary focus is on inflation, whereas at this stage we feel that you have dealt with the inflation issue, you have it under control, we′re very concerned about growth, and that probably comes into the equity investors as well, and so perhaps from that perspective the feeling is, like Mamuketi says, there′s all these risks, but perhaps you do have space to provide a little bit of support for the growth which is currently perhaps the biggest concern. Okay. Driel, do you want to comment on that? I′m going to bring AI into this. AI, okay. So we can run kind of natural language type processing models to systematically measure sentiment in statements, and yes, over time the SARB is generally on the hawkish side of such models. Maybe that′s what′s necessary, that′s maybe how you successfully anchor expectations at 4.5, and maybe that is how you are seemingly continuing to do this, and maybe this is what′s going to be behind getting expectations even lower from here. You know, this notion of overreacting to upside shocks and discounting or looking through downside shocks, that′s exactly what Claudio Borio was arguing for yesterday. So maybe that′s not such a bad thing, and it kind of speaks to this kind of opportunistic disinflation that we came across yesterday. So from my perspective, that′s fairly typical. Maybe, Chris, just to pick up a few of the threads here, and I wonder if there′s a slight difference in perception between local investors and international investors. I do speak mainly with fixed income investors, but it′s very rare that anyone thinks that the tightest stance of monetary policy or the credibility of monetary policy is in any way holding back growth in South Africa. On an international comparison, it′s well recognized that there are emerging markets that are able to grow faster for a whole host of reasons. I can′t think of an instance where any investor has suggested to me that the longstanding structural issues impeding growth in South Africa in any way compare with the cyclical stance of the central bank when it comes to monetary policy. So it′s really interesting for me to pick up on all the commentary that people do think that the Saab can sometimes be too hawkish. It′s unlikely that many international investors are making that connection between the monetary policy stance and growth outcomes. Great. Can I make some response to that? I think it′s a very marginal debate. Firstly, all of the international investors recognize it′s more about the reforms and how much this operation will achieve and all the rigidities, etc. So there′s no doubt about what′s more important in holding back growth. But I do think there is a marginal debate. I was in the UK on a roadshow the week before the MPC meeting. There was not a single investor who didn′t say to me they think the Saab should cut, Saab is not likely to cut. But again, it′s a very marginal debate. Could we have had another 25 basis points? It′s not going to change the growth trajectory dramatically, but if your growth last year was only 0.6, their argument is just take the 0.1 if you can get it.
Theme: Navigating the Challenges of Inflation Targeting and Monetary Policy
The South African Reserve Bank’s Biennial Research Conference in Cape Town continues talks for a second day now, as regional central bank governors and financial policy makers meet to discuss a new era of inflation-targeting regime. Earlier, a panel of private sector experts sat down for a discussion to unpack industry’s role in this. The conference has focused on key topics such as communication strategies, the credibility of the monetary policy, and the balance between inflation targeting and economic growth. The conference started off with discussions on how central banks communicate when they are outside the target range. One of the key points raised was the importance of justifying the decision to keep rates on hold, especially when forecasting to meet the target. The addition of detailed scenarios in the last monetary policy statement was highlighted as a positive step in enhancing transparency and communication with investors. The transparency and credibility of South Africa’s inflation-targeting regime was commended by the panel of experts. The South African Reserve Bank (SARB) has been recognized for providing higher levels of access to its policy decisions, compared to other emerging markets. The smooth transition to the new monetary policy implementation framework was also praised, indicating the market’s confidence in the bank. There was a discussion on the perception of the SARB among different types of investors. Fixed income investors generally view the SARB positively, understanding the rationale behind its decisions. However, equity investors often advocate for lower rates, which reflects a common desire for reduced borrowing costs to boost stock prices. This dynamic highlights the challenge of balancing the interests of different investor groups. The debate around the SARB’s hawkish stance was also addressed during the conference. The panel emphasized the importance of considering both upside and downside risks in monetary policy decisions. While the SARB has been perceived as conservative in its approach, especially in managing inflation expectations, there were suggestions to provide more support for economic growth, considering the current uncertainties. The discussion also touched upon the international perspective on South Africa’s monetary policy. While local investors may have varying opinions on the impact of SARB’s policy stance on economic growth, international investors generally view the central bank’s credibility positively. The importance of structural reforms and economic factors beyond monetary policy in driving growth was highlighted as a key consideration. Overall, the conference provided valuable insights into the complex dynamics of navigating the inflation-targeting regime. The discussions around communication strategies, policy credibility, and the balancing act between inflation control and economic growth shed light on the challenges and opportunities facing the South African Reserve Bank in its monetary policy decisions.
"The debate around the SARB’s hawkish stance was also addressed during the conference. The panel emphasized the importance of considering both upside and downside risks in monetary policy decisions. While the SARB has been perceived as conservative in its approach, especially in managing inflation expectations, there were suggestions to provide more support for economic growth, considering the current uncertainties."
SARB, Research Conference, inflation targeting, central bank, monetary policy, South Africa, economy, investors, communication strategies, credibility, economic growth, policy decisions, transparency, financial markets