SA regulators shielded the banking sector from the financial crisis

SA’s tight banking regulations have drawn praise for shielding the sector from the worst of the financial crisis that claimed iconic institutions such as Lehman Brothers two years ago.

In a joint report issued yesterday, the International Monetary Fund (IMF) and World Bank said local banks and insurance firms had remained profitable during the crisis, while their capital adequacy ratios had remained above the regulatory minimum.

The report states:

Important elements for inflation targeting for emerging economies

The fifth chapter of a forthcoming monograph from the IMF entitled On Implementing Full-Fledged Inflation-Targeting Regimes: Saying What You Do and Doing What You Say, has been issued as a Working Paper.

It examines whether certain conditions have to be met before emerging economies can adopt an inflation-targeting regime and provides some empirical evidence on the matter. The issues analyzed are:

• The priority of inflation targeting over other goals, 
• the absence of fiscal dominance, central bank independence, 
• the degree of control over the policy interest rate, 
• a sound methodology for forecasting, and 
• the soundness of financial institutions and markets, and resilience to changes in exchange rates and interest rates.
  

Strauss-Kahn warns over policies to weaken the rand

The MD of the International Monetary Fund (IMF), Dominique Strauss- Kahn, said “the way to help exports has more to do with competition in the economy rather than the value of the currency.”

Improved competition would also create more jobs and curb inflation, raising the living standards of the poor, he said.

Trade unions and some senior members of the African National Congress have been lobbying for changes to the official policy of allowing markets to determine the exchange rate of the rand.

The unit was at R7,39/ late yesterday, a level Strauss-Kahn said was probably at the “strong end” of a manageable range.

Sustained rand strength has fanned fear about the competitiveness of local exports, which are leading SA out of recession.

Inflation targeting in the West

An International Monetary Fund staff paper released on 12 February suggested that policymakers might consider raising their inflation target to 4% from 2% to allow monetary policy to be more effective in future deflationary crises.

The paper, “Rethinking Macroeconomic Policy”, said that the 2% target chosen by most central banks was sufficient ”in a world of small shocks.” But during the financial crisis of 2008, which triggered a broad collapse in aggregate demand, central banks could not effectively cut interest rates below zero, limiting the effectiveness of their monetary policy.

“Higher average inflation, and thus higher nominal interest rates to start with, would have made it impossible to cut interest rates more, thereby probably reducing the drop in output and the deterioration of fiscal positions,” wrote lead author Olivier Blanchard, the IMF’s research director.