Relevance of the SA Reserve Bank to the development agenda

Address by Dr Monde Mnyande, Advisor to the Governor and Chief Economist, South African Reserve Bank (SARB), at the Inkululeko Media & Marketing Power Breakfast, Avianto Hotel, Muldersdrift,
09 April 2010

Stable prices, that is, low inflation, stable currency value and stable financial systems are bedrock ingredients for the economic wellbeing of any society. These ingredients form the core of what the South African Reserve Bank or any other central bank for that matter does. Explained differently, the realisation of these ingredients is the most important way in which the Bank can contribute to the developmental agenda of South Africa.

... The Bank's mandate is explicitly set out in the Constitution of our Republic as “protecting the value of the currency in the interest of balanced economic growth”. The main contribution therefore that the Bank can make to the development agenda of South Africa is primarily through the fulfilment of this mandate. The Bank fulfils this mandate by ensuring 1) price stability and 2) financial stability. To ensure price and financial stability, the Bank uses monetary policy and provides a variety of other essential financial services to the economy.

The other crucial functions of the Bank that are seen as enabling factors for the development agenda include the prudent supervision of banks, as well as management and maintenance of the national payments system. These, among others, are important in ensuring the effective flow and settlement of cross-border capital between South Africa and the rest of the world. Another function that was explicitly emphasised by the Minister of Finance, Mr Pravin Gordhan, in a letter to the Governor clarifying the expanded mandate of the Bank, is that of financial stability, which entails detecting and reducing threats to the financial system as a whole. South Africa, as a small open economy, has grown by successfully integrating into the global economy and gaining access to international capital markets over time. In cognisance of the strategic contribution of these critical central banking functions, the Bank will continue to manage prudently, effectively and efficiently its component of macroeconomic plane.

Mnyande said, inter alia:

South Africa has done better under the inflation-targeting framework than during other previous monetary policy frameworks. The success of the policy is largely attributable to the flexible way in which it was implemented.

... economic growth is a function of many factors. Monetary policy is just one element in a set of economic policies, such as fiscal policy, industrial development policy, agricultural policy, mining policy, education policy and an array of many other microeconomic policies.

The recent adjustments to the repo rate ... have shown that the fluctuations in the nominal exchange rate of the rand are beyond the policy decision on the repo rate by the Bank’s monetary authorities.

... countries with large current-account deficits experience an appreciation in their domestic currencies. The appreciation of the domestic currency may reflect strong capital flows into the domestic economy, encouraged by high yields, gains in share prices and strong macroeconomic fundamentals that support real economic growth.

The Bank ... will intervene in the foreign exchange market when necessary. The extent of intervention, however, must be limited given the cost implications of this exercise.

These aspects are covered in more detail in the speech.