Governor strikes back: SARB has duty to protect rand

Cape Town – The South African Reserve Bank (SARB) has a “constitutional mandate ... to protect the value of the currency in the interests of balanced and sustainable growth”, governor Lesetja Kganyago said on Monday evening.

Kganyago was speaking in Johannesburg at a banquet hosted by the Centre for Education in Economics and Finance.

“Through history, some countries have tried to deny these truths (regarding currency and inflation management), pretending that high inflation somehow begets sustainable growth," he said. “This kind of macroeconomic populism is usually a precursor to misery, not least because it impoverishes nearly everyone in society.

“The few who benefit are those that somehow are able to capture a dwindling supply of the necessities of life or gain privileged access to foreign currency (for a short time). Neither the middle classes nor the poor of high inflation countries are likely today to be partisans of such an approach to policy.”

READ THE GOVERNOR'S FULL SPEECH: SA's crisis of confidence and the policy response

Kganyago's speech follows a report by Public Protector Busisiwe Mkhwebane on Monday, which recommended that the Portfolio Committee on Justice and Correctional Services initiate a process to change the Constitution “in pursuit of improving socio-economic conditions of the citizens of the republic”.

She recommended they amend a paragraph in the Constitution that removes reference to “protect the value of the currency”.

The news shocked currency traders around the world and the rand slid by 1.4%, trading around R13 to the dollar. Government bonds saw a rise in the yields of 10-year local currency bonds.

"The call will be seen as a threat to an institution that has so far avoided sharpened political attacks by allies of (President Jacob) Zuma on banks and the Treasury for allegedly serving 'white monopoly capital' over the majority black population," UK-based Financial Times reported.

READ: Rand tanks as Public Protector opens Pandora’s box on currency laws

The SARB told Fin24 that it “is still studying the Public Protector’s report on the loan granted to Bankorp and will thereafter announce its response to the findings and remedial actions”.

National Treasury told Fin24 via Twitter that it "has not yet received the report from the PP, thus (is) not in a position to comment at this stage. Once received, it will study it."

READ: Why it’s not for Public Protector to make economic policy

However, Kganyago’s speech made SARB’s stance clear on changing this paragraph in the Constitution.

“Balanced growth is about seeing to it that the value of the currency allows both exporters and importers to engage productively in the economy,” he said.

“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," he said.

"All of this is clearly in the interest of all South Africans.

“We implement this mandate through a flexible inflation targeting framework,” he said.

“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,” he said. “There are several reasons for this.

“Low inflation helps maintain the value of the money in your pocket. This is good for all South Africans, but especially the marginalised and poor – those without the information or power to protect themselves from inflation.

“Low inflation also helps maintain the competitiveness of South African goods and services in foreign and domestic markets, by moderating real exchange rate appreciation.

“Furthermore, low inflation produces lower interest rates. In summary, there is no long-term trade-off between growth or inflation. Keeping inflation low, protecting the value of the currency, is supportive of growth."

SUBSCRIBE FOR FREE UPDATE: Get Fin24's top morning business news and opinions in your inbox