Sunday, February 28, 2021

The central bank and its interventions

When Bank of Botswana (BoB) Governor, Moses Pelaelo, sat down to engage Journalists last week Tuesday on the subject of “The importance of communication in macroeconomic policy management,” it seemed to reveal discrepancies in the active role that the Central Bank plays and the response of market players who in view of the Central Bank decisions react suitably.

One factor to point at which gives credence to the suggested mismatch is that the decisions made by the Central Bank do not come into effect in real time. According to the Central Bank whatever changes it initiates now will only pick up in the future. In other words, the decisions seen today are a response to past economic conditions. More specifically, BoB says that it takes two to three years for the monetary policy to take off in the economy. This is because the reactions by the different transmission channels to such decisions take time in effectively kicking in.

In this case such policies as the monetary policy and the exchange rate policy which Pelaelo aptly described, seemed to differ to the current reality on the ground as it is perceived. For example, the monetary policy’s position is that a reduction of interest rates introduced by the central bank, will lower the cost of finance, therefore, potentially leading to higher demand by consumers and investment by businesses, ultimately raising the overall rate of economic growth. That said, commentators have on the other hand observed a high cost of borrowing due to banks’ strict lending conditions in their attempt to keep their exposure in check. This is because of the depressed market conditions which businesses are grappling with, which as a result places a higher risk on their ability to repay the loans.

One could in that sense borrow from of the words of Ha-Joon chang, a teacher of Economics at Cambridge University, which say “My belief is that Economics should be defined not in terms of its methodology, or theoretical approach, but in terms of its subject matter, as is the case with all other disciplines.” The point he makes is that methodology assumes that there’s only one right way of doing economics, whereas defining it as a subject matter looks at many different ways of doing economics, “each with its emphases, blindspots, strengths and weaknesses.” This view may propose to such important institutions as the Central Bank to expand its interpretation of the economy from the methodologies it currently employs.   

Specific to the subject Pelaelo delivered on, a vibrant and knowledgeable media was therefore recognised as an important support to the role that BoB plays in discharging policies. He recognised the need for consistency in definitions and in meanings of adjectives attributed to magnitudes of changes and movements in economic indicators, as well as the wording/interpretation of policy action (or non-action).  “To the extent that such common language is accepted and used by the media, policy analysts and commentators, it becomes a tool in policy formulation that has an intended impact on economic decision making. However, on the other hand, misreporting, either deliberately or due to lack of understanding of some key concepts, could cause unnecessary confusion in the market and, therefore, be detrimental to the implementation of these macroeconomic policies,” he said. Pelaelo sought to that end to illustrate the influence of the various policies and related instruments on real economic activity, others discharged by the Central Bank and their link to communication which acts as a useful way to create economic awareness and as such assisting with appropriate actions.

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