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SARB isn't crippling growth in SA - economist

Jun 23 2017 05:30

Cape Town - The SA Reserve Bank (SARB) should be regarded as an enabler for South Africa to successfully meet its growth and transformation challenges, according to Dr Kenneth Creamer, economist from Wits University.

He said despite criticism, it is extremely unlikely that the SARB will abandon inflation targeting. Currently SARB has a mandate from government to keep inflation between 3% and 6%.

Dr Creamer said inflation targeting is widely accepted in South Africa and in many other countries around the word as an appropriate framework for the conduct of monetary policy. 

"One modification is that South Africa follows a flexible inflation targeting framework, which means that while the overall objective is to ensure price stability, there can be some flexibility in the pursuit of this objective, for example, if the economy experiences an unexpected shock like a sharp exchange rate depreciation, or an increase in the oil price, or if food prices rise due to a drought," he explained. 

Sweeping changes

Public Protector Busisiwe Mkhwebane shocked the markets when she recommended constitutional changes to make the SARB abandon its policy of currency and price stability and promote balanced and sustainable economic growth instead.

She wants Parliament’s justice committee to get the ball rolling in this regard.

Mkhwebane recommendation was part of her report in which she asks the government to recover R1.125bn public funds "unlawfully" given to Absa Bank.

This related to her investigation into the SARB’s assistance to Bankorp - which Absa bought in 1992 - between 1985 and 1995.

The SARB hit back saying Mkhwebane’s recommendation is unlawful.

Protecting the rand

SARB's constitutional mandate is to protect the value of the currency in the interest of balanced and sustainable economic growth.

"In practice, this has meant that the SARB has increased and reduced the country's interest rates with the aim of keeping inflation within a 3% and 6% target range," explained Dr Creamer. 

"Since the 2008-09 global recession, which was caused by excesses and errors in the global banking system, the SARB's mandate has also increasingly been interpreted to include macroprudential measures, such as monitoring and regulating bank lending practices, with the aim of ensuring the overall stability of South Africa's financial system."  

Dr Creamer reflects that there have been some significant criticisms of inflation targeting, but none of these have been terminal to the overall framework.

"US economist Joseph Stiglitz criticised inflation targeting as in his opinion the inflation targeting framework was one-eyed and failed to notice problems with the overall stability of the financial system, leading to the crisis of 2008-09 with its epicenter in US financial system."

He said in response to this criticism, the SARB, the Bank of International Settlements and many other central banks around the world have begun to include issues of macroprudential management and financial regulation as part of their overall mandate. 

Inflation and financial stability

"In a sense, they have responded to Stiglitz's criticism, not be rejecting inflation targeting, but by widening their mandates to include both inflation targeting and the targeting of financial stability."

Dr Creamer said in South Africa, some critics of inflation targeting argued that inflation targeting will lead to higher interest rates.

"In fact the opposite has occurred as inflation targeting has been associated with a period of significantly lower interest rates, due in part to lower inflation expectations associated with inflation targeting and in part to global low inflation conditions."

He said this can be seen in the high South African interest rates of the 1990's compared with the much lower interest rates since inflation targeting was introduced since the early 2000's. 

Growth and job creation

Another criticism has been that it would be better for monetary policy to focus on growth and job creation, Dr Creamer said.

"It is true that growth and job creation are South Africa's most critical economic challenges, but these challenges would best be addressed by a credible growth and transformation strategy, including effective delivery of education and social services, improved performance of state owned companies and increased levels of private and public sector investment."

Monetary policy, Dr Creamer said, can contribute to such a growth by providing the necessary conditions of price and financial stability.

"In fact, the maintenance of such price and financial stability is a necessary condition for successful growth and economic transformation in South Africa. As such, the current role of the SARB should be regarded as an enabler, and not a constraint, if South Africa is to successfully meet its growth and transformation challenges."

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