BYRON BOTHA AND DAAN STEENKAMP: Reserve Bank could do much more to increase transparency

No-one’s projections can ever be perfectly accurate. But since many important decisions are taken based on how the SA Reserve Bank is expected to act, people should be able to rely on the process the Bank uses.

The future is unknowable, so of course mistakes will be made, which is why transparency is so important. Reserve Bank chief economist Christopher Loewald wrote recently that its forecasts have been more accurate than the IMF’s estimates for SA and than the forecasts of the Bank of England, European Central Bank and Federal Reserve for their economies (“How Reserve Bank’s forecasting fares in uncertain times”, June 12).

However, our research suggests these forecast comparisons are incorrect. We raised the issue with the Bank but did not receive clarification. In the accompanying chart we compare the Bank’s published projections from all monetary policy committee (MPC) statements between 2016 and 2023 with forecasts of other central banks from the Ben Bernanke review of forecasting by the Bank of England.

Contrary to the Reserve Bank’s assertion, we do not find its inflation forecasts to have been more accurate than those of major central banks since 2016, even though it has performed well since 2021. This comparison is possible only for inflation, as the Bank does not make quarterly forecasts of GDP available. However, the GDP forecast errors presented by the Bank in the article are far lower than presented in our pre-Covid study of Reserve Bank forecast errors published in the SA Journal of Economics. The country experiences more economic volatility than major advanced economies, so it is not surprising that it is harder to predict macroeconomic outcomes for SA.

In a complex, uncertain world forecast errors are inevitable. Whether forecast errors might do damage to an institution’s credibility depends on whether policymakers demonstrate that they understand the factors behind these errors and incorporate what they have learnt in their judgments about the risks to the outlook. This means transparency about monetary policy deliberations and clear communication are crucial to ensuring the market can assess whether the central bank’s judgments are reasonable and that it is credibly committing to its policy target. Unclear communication of its judgments and poor-quality analytical outputs risk weakening the Bank’s perceived credibility in the eyes of market analysts and the public.

Technical tweaks

Is the Reserve Bank sufficiently transparent? The vast academic literature assessing central bank transparency stresses the importance of publishing projections, alternative scenarios, or qualitative and quantitative assessments of the balance of risk about projections, and periodic publication of external reviews. The Bank does not publish quarterly projections for its policy rate or alternative scenarios, nor has it published its recent external model review.

A few technical tweaks in how the MPC communicates its decisions would go far in improving the public’s understanding of its policy stance. Being more transparent about the information used to make decisions, its underlying assumptions and the process by which decisions are reached allows external parties to interrogate whether the Bank’s decisions are credible and its modelling and forecasting practices fit for purpose.

The real problem with MPC communication is that it does not communicate its policy stance through its projections, with its decisions sometimes diverging from the published policy rate forecasts that accompany a decision. When words and deeds do not align, it undermines the MPC’s credibility.

There is widespread agreement that the Bank’s current MPC has served SA well. But weakening monetary policy credibility has real implications for the economy. If credibility weakens, shifting to a lower inflation target, as the governor prefers, would imply higher interest rates for longer and therefore a higher cost in terms of growth and employment.

The Reserve Bank is a big data provider and could do much more to democratise access to public domain data. Consider the banking data it publishes. Though the Bank publishes detailed bank-level balance sheet statistics, it does not make bank-level regulatory compliance data available. This conflicts with the spirit of the Basel III principle of market oversight.

The flipside of the Bank’s independence is that it has a lot of discretion in its decision-making in how it implements monetary policy, regulates banking and insurance, manages foreign exchange and approaches financial surveillance. Discretion, when not accompanied by policy transparency, opens the door to political interference or leaves the institution vulnerable to rogue decisions by future governors. A recent example is the experience of Turkey, which has experienced rapid inflation and currency depreciation due to political interference. SA has experienced political interference into macroeconomic governance before, with the firing of then finance minister Nhlanhla Nene in 2015.

Limited information

The Reserve Bank is not transparent about many aspects of its other policy frameworks or the governance processes surrounding them. Take foreign exchange reserve management. In this area leading central banks publish policy documents detailing the goals of their framework, their operational targets, and periodic assessments of the appropriateness of policy implementation. Is the Reserve Bank’s foreign exchange framework appropriate given SA’s particular macroeconomic risks? How well has it managed the gold & foreign exchange contingency reserve account (GFECRA)?

One cannot evaluate such questions because of the limited information the Bank publishes about its framework or how well it has stewarded the portfolio it manages on behalf of South Africans. With monetisation of some of the GFECRA balance recently announced, it will be important for the Bank to demonstrate that it appropriately sterilised the distribution of these funds to government and neutralised the impact on interest rates. The Bank must improve the transparency of its data reporting to demonstrate that such transfers avoided undermining SA’s monetary policy framework and the solvency of the central bank.

The Reserve Bank has tremendous powers and operational independence. Transparency and governance frameworks are important to keep unelected technocrats accountable. The Bank must make enough information available and expose itself to periodic public external review, so that South Africans can be confident it is competent in its exercise of its duties and pursuing policy in the best interests of our society.

• Botha is chief technology officer of Codera Analytics. Dr Steenkamp is CEO of Codera Analytics and a research fellow with the economics department at Stellenbosch University.