Kganyago: Challenge for central banks to ensure independence not undermined

Cape Town - An independent central bank, with a clear mandate to maintain price stability and without the concerns of the electoral cycle, is better-placed to focus on and achieve price stability, according to SA Reserve Bank governor Lesetja Kganyago.

He spoke at the National Asset and Liability Management Conference in London on Friday.

"The policies that are available to achieve or maintain financial stability often require cooperation between various regulatory authorities. A challenge for central banks is ensuring that monetary-policy independence is not undermined in the process. This is particularly the case in the event of conflicts between competing objectives," said Kganyago.

"If independence is to be maintained, central banks need to foster the political consensus that underpins independence. This requires even greater transparency and accountability than in the case of monetary policy."

In his view, central banks also need to have the courage and political backing to make tough calls.

"There is always the danger that unhappiness with central-bank actions in the financial-stability field could undermine the credibility and legitimacy with respect to their core mandate of price stability," he said.

Kganyago pointed out that it is generally accepted among central bankers that, while monetary policy can affect cyclical growth, its ability to determine longer-term potential output is limited.

"The case for central-bank independence is based on the... argument that politicians promise low inflation, but are tempted to go for higher growth through expansionary monetary policies," he explained.

"The problem of ceding enormous power to unelected officials in democratic societies is solved by distinguishing between goal independence and operational independence."

In his view, concerted central-bank actions were probably successful in preventing a full-blown global depression, but their ability to bring about a growth recovery was less certain.

"Recovery has taken some time, and it is only now that we are seeing a return to ‘normal’ growth rates on a sustainable basis. We have yet to see if the massive expansion of balance sheets and the high levels of liquidity generated by low interest rates and quantitative easing will ultimately lead to the high inflation that some have feared. While this is unlikely, it remains a risk," he said.

According to Kganyago, emerging markets in general appear to be more resilient in the face of the recent market volatility, because their macroeconomic fundamentals and policies have improved.

"It would appear that, at long last, the recovery from the global financial crisis is on track. It has been a difficult path, with a number of false starts and disappointments," said Kganyago.

"No doubt, the road going forward will not be without its difficulties. The recovery itself is expected to bring about new challenges, particularly for emerging markets."

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