Signs And Wonders

I know him and have served as co-panelist with him in seminars organized by the International Monetary Fund (IMF) and the Bank for International Settlements (BIS) many years ago. As central bank governor of the South African Reserve Bank, Lesetja Kganyago could not have been clearer in putting in the public domain the typical but compelling issues that emerging markets like South Africa and the Philippines face today. This is all about “keeping inflation from drifting above our targets, resisting demands for lower interest rates to lift short-term economic growth, and financing unsustainable fiscal positions.”

In the Philippines, some have proposed, and in some instances, directed, that we use all legal tools to control the prices of rice and ensure that it is always available. In the past, rice could drive the consumer price index to dizzying heights. Some quarters have also proposed more sales of the US dollar by the Bangko Sentral ng Pilipinas (BSP) to keep the peso strong and inflation under check. The Philippines is a net importer of goods and services, so they expect that a strong peso is good for inflation management. Without adjusting the BSP policy rate, that measure will not be sustainable. We would simply dissipate our gross international reserves (GIR) for nothing. Fundamental reforms in our production and trade are obviously critical; our problems are definitely systemic.

Others would even advise the monetary authorities to refrain from doing anything because we are facing inflation that is mainly cost-push. It is driven by the short supply of goods and services and an imperfect value chain. Logistics would just have to be sorted out. Inflation pressures are considered temporary. In hindsight, we are wiser to realize that the US Fed bought into this idea and Chairman Jim Powell had to catch up in a big, perhaps disruptive, way. We were also a victim of this misguided thought, keeping our hands tied while inflation was clearly on an inexorable ascent last year. The BSP was compelled to do an unprecedented 75 basis points increase in an off-cycle meeting of the Monetary Board to make up for such a monetary slippage.

What were the key areas of experience in inflation management that Governor Kganyago share in his article published by the IMF’s Finance and Development in March? The article is entitled “A Road Well Traveled.” His contribution stressed that in a period of high inflation, emerging markets have lessons to share with advanced economies.

Managing supply shocks is the first lesson that Kganyago shared. Unlike in advanced economies, which debated on how to achieve their inflation targets given interest rates that were close to zero and inflation that was already too low, the issue in emerging markets could be as plain as the central bank having to explain to the public why it must move even when supply shocks are dominant. Kganyago admitted that in his 12 years with his bank’s Monetary Policy Committee, he was more absorbed in measuring the impact of supply shocks and explaining to the public how they differentiate between transitory and persistent effects. Demand pressures lend themselves more to monetary policy.

The South African governor argued that at least in his country, even with moderate inflation, price and wage setters do monitor inflation and index their prices accordingly. We don’t have to remind ourselves about the Philippines’ price tag law which requires appropriate tags or labels to indicate the prices of consumer products. Without such, constant re-pricing could happen. Profiteering gives birth to higher and more persistent inflation.

However, if central banks choose to be passive in dealing with persistent supply shocks like bad harvests, it is possible price pressures could magnify and inflation expectations upset. As argued in our previous columns, this would render monetary policy very much behind the curve. What could have been more transient ends up more persistent with second round effects.

Thus, if we hear economists arguing that we refrain from doing anything about those supply shocks which dissipate over time, beware. In many emerging markets, we see very volatile pricing and in Kganyago’s language, less tolerance for real income losses. Since current inflation is likely to persist in the future, policy responses from the central banks should be done more often as necessary. Inflation matters to both households and firms, and the quarterly business and consumer expectations surveys of the BSP should prove that.

The second lesson is all about the mandate of the central bank. We love how Kganyago explained that monetary policy can be distorted by fiscal policy, as many central bankers from emerging markets would have experienced. This is evidenced by the increasing concerns about fiscal dominance. Since it is the central bank’s balance sheet that is bound to be hit, we share Kganyago’s point that central bank mandates “remain simple and direct.” This means governments should implement a broader macroeconomic strategy that would promote economic growth and other social goals including fiscal sustainability. Heavy lifting by the central banks, like what they did during the Global Financial Crisis, has its limits.

Governor Kganyago cited the South African experience in the 1990s when they started to implement three-pronged macroeconomic reforms that permitted it to reap a consistent period of economic growth. They decided to float their exchange rate, freeing them from years of costly and ineffective exchange rate intervention. They shifted to market-friendly inflation targeting as a monetary policy framework, resulting in lower interest rates and more stable prices. They exercised fiscal restraint that brought about fiscal sustainability that helped avoid incurring too much debt that could have crowded out the private sector from the capital markets.

Of course, he admitted that there were very difficult challenges in doing public policy and South Africa was not spared from episodes of low growth in the process. During those times, it was monetary policy that “held the line, but monetary policy is not everything.”

In the Philippines, we should expect that tight monetary policy could have a depressing impact on economic growth. But it is important that we don’t blame monetary policy that addresses high inflation because high inflation could also depress private consumption and discourage private investment, leading to lower growth. Instead, the other branches of government should also do their share, especially in managing supply shocks. The primary mandate of the BSP is price stability.

The final lesson shared by the South African governor is “how to maneuver when making policy and… how to strike a balance between acting resolutely and remaining open to new ideas and information.”

He observed that advanced economies face the problem of groupthink. We share his view that in emerging markets, there could be different levels of opinions, ranging from whether policy rates should be adjusted, or to do nothing, to how much to adjust. Different views are held not only on the policy board but even beyond. In the larger society, there might be thousands who would keep some other variants of monetary policy views.

To promote effective public policy, Kganyago proposed that divergent views on tactical issues should be welcome, but consensus should prevail on what he called the grand strategy.

We admire the singularity of his commitment to the central bank mandate laid out in the South African Constitution, and that is to protect the value of the currency in the interest of balanced and sustainable growth. Making an issue out of the central bank’s role in the economy is a non-starter. It’s been decided by the framers of the Constitution.

“Diversity of opinions is important, but not everything needs to be pulled apart.”

On this basis, central banks should stay the course when making monetary policy, reiterating as necessary their strategic goals. Any kind of support from civil society should be nurtured and expanded. Expect that critics would ignore the challenges of central banking, that when the central banks decide, they decide with uncertainty as to future and attendant risks.

Kganyago advised that when it comes to tactical operations, central banks should be more open minded. Changing their mind should always be an option. It is important that the governor of the central bank should be the sole policy spokesperson. Not any of his deputies, who could be entrusted with explaining the data and the results of econometric exercises behind the policy choice. Not any of the members of the policy board, who might even hold a contrary view.

The South African Reserve Bank governor concluded his article with the need for governments to avoid high levels of indebtedness and to use available financing more efficiently to achieve higher levels of economic growth.

In keeping with his tone, we should recall what former Bank of England Mark Carney wrote in his book, Value(s), about humility. He wrote that humility matters because it is an attitude to leading and governing. It should not be an impediment to taking action. Humility, among others, is recognizing that there could be surprises that need to be dealt with.

In central banking, there could indeed be many surprises.


Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.