Reserve Bank ponders a more muscular role

2012-05-05 10:37

All over the world, monetary authorities have been forced to ditch their inherited conservatism to stave off collapse

The latest sentiments emerging from the SA Reserve Bank suggest that the bank may be rethinking its traditional role and considering a more muscular intervention in the management of the economy.

The thinking emerging from the bank is mindful of developing worldwide trends, where central banks have played a pivotal role in propping up a crumbling economic and political edifice in the global north.

This week Reserve Bank Governor Gill Marcus wrote in the Financial Times that emerging countries like South Africa were caught in the crossfire over what the role of the central bank should be in an era of international financial crisis.

Marcus’ sentiments have enjoyed currency among leftist formations, but have been resisted by the orthodox economics-inclined political principals.

“The South African foreign exchange market is relatively liquid and open. The rand is often used as a hedge for emerging market risk and so it is highly sensitive to changes in risk perceptions, even when the source of the risk is foreign.

“It is easy for the rand to overshoot in both directions,” she said.

“So what can be done? Direct intervention is one option, but our policy has been to avoid deliberately acting to achieve a predetermined exchange rate.

“Lowering domestic interest rates is also an option, but this is not feasible when inflation is at or above the upper end of the inflation target range, which is currently the case.”

The change in thinking also comes shortly before the ANC policy conference next month, where the issue of the bank’s mandate will be debated.

In one of the documents prepared for the conference, the ANC complained of the “narrow mandate of the Reserve Bank or the relationship between and powers of different spheres of government”.

Marcus’ sentiments are also in line with those of Lionel October, the director-general of the department of trade and industry, who in a City Press interview criticised the Reserve Bank for failing to take action against the “overvalued” rand.

“All over the world, central banks manage their exchange rates, but in South Africa we are still following the old view of the pre-2007 Washington Consensus, where the focus is on targeting inflation.

“This is the wrong policy. You have to intervene to stabilise the currency when it becomes too strong,” October said.

“It is frustrating that we are not intervening to deal with the problem. We are still letting the markets dictate the value of the rand. We need to intervene to ensure we have a stable and competitive currency,” he said.

These days central bankers – as bankers of last resort – have stepped into the gap and bought up government bonds – shoring up not only a financial system, but a crumbling political edifice of an entire region – such as the eurozone.

Given that central bank financing of governments is outlawed under European Union law, such moves have caused anxiety worldwide as the lines between fiscal and monetary policy – government’s role and that of central banks – become blurred.

Due to the recent crisis in financial markets, central banks throughout the world have experienced profound shifts that have challenged their traditional “independence” from governments.

According to the Financial Times, “since the onset of the crisis, the world’s monetary authorities have been forced to ditch their inherited conservatism and embrace extreme measures to stave off financial collapse”.

They report a sea change in approaches to monetary policy.

Central banks have repeatedly been called upon by governments and banks to provide support, and their actions have revealed the limitations of their traditional “independence from politics”.

Recently, ANC documents released advocated a review of that section of the Constitution that creates the legal framework in which the Reserve Bank operates.

This part says the main role of the “SA Reserve Bank is to protect the value of the currency in the interests of balanced and sustainable economic growth in the republic”.

It says the SA Reserve Bank “must perform its functions independently, without fear, favour or prejudice, but there must be regular consultation between the bank and the cabinet member responsible for the national financial matters” of the country.

In a section of the document called “The Second Transition”, the ANC says the Constitution of 1996 “may have been appropriate for a political transition, but it has proven inadequate and even inappropriate for a social and economic transformation phase”.

The phrasing suggests the desire for a more active bank – able to use more levers and instruments of monetary policy to manage the economy in a particular direction.

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