[TOP STORY] Multi-mandates versus inflation targeting

SIMON BROWN: I’m chatting now with Redge Nkosi, executive director and research head for Money, Banking and Macroeconomics at Firstsource Money. Redge, I appreciate the early morning time once again. [There is] an article you put out around central banks’ inflation targeting, frankly critiquing sort of the single mandate that central banks seem to stick to, which is that inflation targeting. You’re saying there are examples out there, particularly from Asia, where multi-mandates really [do] work.

REDGE NKOSI: Yeah. It is that single mandate called inflation targeting. Countries are quite flexible in the manner in which they use this particular mandate. The EU, which has a similar mandate was able to go beyond what is traditionally known as interest-rate policy. So there is a possibility of us, as a country, if we know what the monetary policy is all about, to sidestep the interest-rate aspect of it and go into other areas that can stabilise the currency, without having to use interest rates.

So what I’m trying to say here essentially is that we cannot be dogmatic – we are so dogmatic in such a way that we’ve lost our way and we are actually collapsing the economy as a consequence of simply sticking to this particular so-called ‘mandate’ without understanding what ‘mandate’ means.

SIMON BROWN: And it’s that narrowness. I take your point, absolutely. Yes, we don’t like inflation, but there’s a lot else out there. You say they could use tools beyond just interest rates, which in and of itself is a relatively blunt tool. What could some examples be?

REDGE NKOSI: Fundamentally, from a macroeconomic perspective you can use what you call credit.  You can vary credit, you can ask your banks to vary credit if you’re a central bank that understands how credit plays.

So the fundamental tool used by Asia, including Bangladesh, which is a least developed country, is that they were using credit, varied credit, which can give [me] credit that I [use to] go and buy suits, or [if] you give me credit that is going to put up a plant, frankly inflation is going to differ. So you can actually monitor inflation through credit. That is the primary tool that should actually be used. You can also use other forms anyway, but credit is the fundamental, the primary tool you can use, instead of having to use interest rates.

SIMON BROWN: You mentioned Bangladesh. In your article you referenced them quite a bit, and they absolutely in many senses are the poster child for what you’re talking around here. Whereas our own central bank … You mentioned the phrase of ‘structural employment’, which almost gives the Sarb a way out. They say, well, unemployment is structural, [there’s] nothing we can do. But hang on a sec – at least be trying. And frankly it can become less structural and we can try and fight it, instead of just that single focus.

REDGE NKOSI: That’s really the issue here. What has become the game for the Reserve Bank and the Treasury is to assume that the unemployment that we have is structural, but ‘structural’ by definition means we are producing people who are irrelevant to the jobs that are being created. So we are producing engineers while we need scientists of some sort and so on and so forth. But that’s not necessarily the case. But they work out in such a way that it should be seen as if it’s structural, when in fact it’s destruction. What we have done is because we are so used to using a particular tool, that particular tool leads us into creating what we think is structural employment, when in fact it’s not.

South Africa can only be cured, as I speak now, quite easily.

If you say ‘structural employment’, what does that mean? It means you have failed, you have nothing else you want to do, but what you should now do is only go and sell Eskom to become private. Okay? So you go selling it, you [emply] structural reforms like opening up pipes to have much water flowing. You can do all of that. We know it does help, but it’s not going solve the unemployment problem in this country. What’s going to solve the unemployment problem in this country is to ensure that the banking system works properly, the fiscal policy is engineered properly, the monetary policy itself is also engineered in such a manner that it works together with fiscal policy and boosts the economy.

All manner of saying ‘structure, structure’ is not going to help us. What the Reserve Bank can do is absolve itself away from solving the national challenge by sticking to the little they know. And we are saying it shouldn’t be like that.

SIMON BROWN: And using the structural as, frankly, an excuse.

We’ll leave that there. I always appreciate the time. Redge Nkosi, Firstsource Money, thanks for the early morning insights.

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