Cape Town – The South African Reserve Bank (SARB) is a “creature” of the Constitution and is mandated to protect financial stability in the country, said governor Lesetja Kganyago in Parliament on Tuesday.
Kganyago and a delegation from the Reserve Bank is briefing Parliament’s standing committee on finance on the bank’s operations.
“The bank has a duty to protect South Africa’s currency in the interest of balanced and sustainable growth. We are mandated to protect financial stability in South Africa,” Kganyago said.
“The SARB has been focusing on financial stability as early as 2002. We have been doing that implicitly.”
Kganyago said the Financial Sector Regulation Bill, which has recently been passed by Parliament, will give the SARB legislative power to target financial stability and take appropriate steps if threatened.
He pointed out though that monetary policy itself cannot solve structural unemployment in the economy. “The SARB is a public institution and as such what we do should be in the interest of the economic well-being of South Africans.”
Kganyago said there is compelling evidence to show that inflation targeting is crucial for financial stability in the country.
“Ensuring price stability or low inflation is a traditional function of central banks. All central banks have this mandate in some form. If the central banks don’t do this, who would control inflation?”
High inflation, he said, has a negative redistributive effect on the economy. "The wealthy have various means to hedge themselves, but the poor don’t. If you are weak and vulnerable you don’t have bargaining power or ways to protect yourself."
According to Kganyago, countries with high inflation also have high nominal interest rates encouraging people to save to compensate for higher inflation.
Conversely, low inflation leads to more investment and growth.
Kganyago’s explanation on the bank's mandate comes as the SARB is expected to present its arguments to have the Public Protector’s remedial action set aside.
The matter will be heard at the North Gauteng High Court in Pretoria today.
In a report released by Public Protector Busiswe Mkhwebane in June, she ordered that the Reserve Bank’s constitutional mandate be changed. The report was based on the investigation into the Bankorp bailout during the apartheid era.
The SARB filed an urgent court application, arguing that the remedial action in the Public Protector report was unlawful and beyond Mkhwebane’s powers. Subsequently, National Treasury, Parliament and ABSA, which bought Bankorp, filed supporting affidavits.
Although the Public Protector chose not to oppose the SARB’s application, it still wants the decision to be confirmed in court, Kganyago told journalists after the bank’s annual general meeting on Friday.
SUBSCRIBE FOR FREE UPDATE: Get Fin24's top morning business news and opinions in your inbox.