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Here's What The Role Of The SARB Should Be, From The Mouth Of Its Boss

"Our fundamental, constitutional mandate is to protect the value of the currency in the interests of balanced and sustainable growth."

15/09/2017 03:59 SAST | Updated 15/09/2017 13:42 SAST
Waldo Swiegers/ Bloomberg/ Getty Images
Lesetja Kganyago, governor of South Africa's central bank.

Extracts from recent speeches by the South African Reserve Bank governor, Lesetja Kganyago.

Monetary policy and why we target inflation: An address at the University of KwaZulu-Natal on 25 April, 2017
Central banks have the power to deliver low inflation. Where monetary policymakers have adopted other priorities, such as financing governments or prioritising high employment, they have caused widespread economic damage. In such cases, countries have struggled with higher inflation, higher borrowing costs and eventually high economic costs to reverse earlier policy mistakes. Such policies tend to exacerbate inequality and deepen poverty.

A credible monetary policy can be more flexible, meaning it can do more about any short-term deviations of employment and output from natural rates. A credible monetary policy can also keep borrowing costs lower than they would otherwise be. This is a central benefit to long-term economic growth and job creation. When inflation rises and stays high, investment decisions are distorted towards short-term investments that carry with them short-term jobs.

Central banks have the power to deliver low inflation.

For this reason, low inflation is a sound developmental policy. It encourages firms across the private and public sectors to make long-term investment decisions that imply productivity growth over time. This is critical, indeed a prerequisite, for sustainable jobs and income growth.

Operational independence: An address at the SANEF Nat Nakasa Awards Ceremony Durban on 10 June, 2017
Central banks are generally viewed as conservative institutions, and 'conservative' implies a reluctance to change. However, there have been significant changes in how central banks operate in the last few decades.

The granting of operational independence to central banks has meant that monetary policy was in essence handed over to non-elected officials.

The granting of operational independence to central banks has meant that monetary policy was in essence handed over to non-elected officials. Holding them accountable would require well-defined goals for monetary policy and effective channels of communication.

The steps towards communication and transparency undertaken by central banks and the SARB, in particular, have been significant. While we have our own communication strategies, we cannot do this without close interaction with the press and broader media. We depend on each other. The press in South Africa has a proud tradition of being open, vibrant and questioning.

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SA's crisis of confidence and the policy response: An address at the CEEF Africa Annual Banquet in Johannesburg on 19 June, 2017
At the present juncture, our fundamental problem is confidence. In economic discussions, 'confidence' is sometimes an opaque and disreputable concept. Paul Krugman in 2010 coined the term 'confidence fairy' for when pundits rely on magical thinking to explain how their favourite policies can have only good effects. But I'm afraid that, in South Africa at the moment, we can't comfort ourselves that confidence is a mythical creature. It would be more accurate to say that it is very real –- but badly endangered.

The message we get from regular South African citizens is fundamentally very similar to the one we hear from the ratings agencies. We have deep-rooted problems of unemployment, poverty and inequality. Our economy is not growing as fast as it needs to, and this problem has been getting worse.

But I'm afraid that, in South Africa at the moment, we can't comfort ourselves that confidence is a mythical creature.

We are now seeing what it looks like when we are not so virtuous. We don't grow at 3 percent anymore; we don't even grow fast enough to keep up with the growth rate of the population. There was a lot to be said for an economy with rock-solid finances, confident investors and 3 percent growth. I think we can do even better than 3 percent growth, but we certainly need not do worse.

Interest rate decisions: An address at the launch of the MPC Schools Challenge in Pretoria on 21 July, 2017
Decisions, whether to cut, increase, or keep interest rates unchanged, are of enormous importance to the economy generally, and they affect most people, either directly or indirectly. This often raises the question: how do central banks make these decisions, and specifically, what factors do they take into account in making these decisions.

One of the channels that many central banks use to explain how they make these decisions and what factors they take into account is to run a competition for high school learners. Typically, these competitions involve a group of learners forming themselves into a Monetary Policy Committee and making a case either to cut, increase, or keep interest rates unchanged.

The MPC Schools Challenge is, therefore, a contribution by the SA Reserve Bank towards improving the understanding by young South Africans of how the economy works, why high inflation is bad for an economy and how the Monetary Policy Committee makes decisions.

We will continue to honour our constitutional mandate and the trust placed in us by the South African society.

Maintaining trust in our currency: A lecture at the Unisa Graduate School of Business on 30 August, 2017
The mandate and role of central banks is a hotly debated topic in many countries around the world. In South Africa, we tend to engage in this debate through rhetoric rather than facts.

The SARB has a very specific job -- to protect the value of the currency in the interests of balanced and sustainable economic growth in the Republic.

Why does our money have value? Why can you exchange it for goods and services? The money is not backed by silver or gold or platinum. It is not backed by land. It is not pegged to another currency, such as the dollar or the pound.

It works because of trust –- trust in a promise made in the Constitution, which gives the South African Reserve Bank [SARB] a very specific job: "to protect the value of the currency in the interests of balanced and sustainable economic growth in the Republic."

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South Africa's crisis of confidence and the policy response at the CEEF Africa Annual Banquet in celebration of 21 years of leadership investment Johannesburg, on 19 June 2017
So what is the contribution from the SARB? Our fundamental, constitutional mandate is to protect the value of the currency in the interests of balanced and sustainable growth. Balanced growth is about seeing to it that the value of the currency allows both exporters and importers to engage productively in the economy.

It also means that the economy's growth is sustainable, that imbalances are neither generated that cause crises through over-heating nor throw the economy into severe downturns. All of this is clearly in the interest of all South Africans.

We implement this mandate through a flexible inflation targeting framework. We sometimes hear the objection that targeting inflation is bad for growth -– that is, one part of our constitutional mandate conflicts with the other, and protecting the buying power of the rand is anti-development. However, low inflation is actually the ally of development.

The ratings agencies have been clear that the effectiveness of the central bank is one of the strongest pillars supporting this economy –- a claim that speaks to both our price and financial stability mandates. We will continue to honour our constitutional mandate and the trust placed in us by the South African society.