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.
  

Marcus fights off greedy punters

The Reserve Bank faces a challenge driven by a small group of shareholders trying to make profit at the expense of the national interest, Bank governor Gill Marcus said yesterday.

The government and the Bank said some shareholders were pushing for nationalisation so that they could be paid for their shares.

"The institution faces a challenge, ostensibly lacking in principle and evidently driven by the self-interested profit motive of a very small minority of shareholders," Marcus said in a letter to shareholders, published on the Bank's website. "This small minority does not appear to care about the national interests of South Africa."

The Bank is one of the few central banks in the world to still be owned by private shareholders, a system originally meant to give South Africans a chance to own a small number of shares.

"Profit making should never be a motive for holding shares in the Bank. The Bank is neither designed nor expected to maximise profits," Marcus said.

Shareholders are entitled to appoint half of the board of directors but have no say in the day-to-day operations, or policies, of the bank.

Source: Times Online

The mandate of the South African Reserve Bank reiterated

An extract from the remarks by Dr Monde Mnyande, Advisor to the Governor and Chief Economist of the South African Reserve BankBank, presented at the Leadership Forum of Airports Company South Africa on 12 March 2010

On 16 February 2010 government clarified and extended the mandate of the Bank. The Minister of Finance’s open letter (see our previous post) to the Governor of the Bank noted the constitutional objective of the Bank. The Bank’s primary objective is to protect the value of the currency in the interest of balanced and sustainable growth. It was also confirmed that the Bank should continue to pursue a target of 3 to 6 per cent for headline consumer price inflation, and should do so within a flexible inflation-targeting framework.

The letter reaffirmed the flexibility afforded the Bank in reacting to current and expected supply-side shocks. The flexible inflation-targeting framework involves a focus on a medium-term time horizon in getting back to the target if the economy experiences an inflation shock, thereby avoiding unnecessary instability in output and interest rates.

Reserve Bank clarifies a SAPA report

Statement issued by Gill Marcus, Governor of the South African Reserve Bank

There are a number of extremely unfortunate and misleading distortions in the SAPA report of the discussions that took place today before the Parliamentary Finance Committee. The appearance before the Committee lasted three and a half hours and a wide range of issues were discussed in a very constructive meeting.

I will only address two issues:
A) The question of the SARB's view of the role of shareholders in relation to ownership of the Bank was raised. The response was that the central bank in any country has a unique place and role. It is a national asset that acts in the interests of the country as a whole, and did not act with a profit motive. In fact in certain circumstances its decisions may require actions that result in a loss of income. It is unfortunate that there are a number of shareholders who, through their actions, do not recognise these responsibilities. They are claiming that the reserves of the SARB should be distributed to shareholders, and talk of nationalisation to effect a change of ownership that would then create the circumstances for this to happen.

What is the Reserve Bank?

Series preface

In light of recent criticism of economic policy in South Africa, particularly the role and responsibilities of the South African Reserve Bank, this series of briefs will provide background and discuss the issues.

The series will cover the following:

1. The South African Reserve Bank currently
2. Monetary policy
   
   
   1. and  the provision of liquidity
   2. and inflation targeting
   3. and the promotion of economic growth and employment
   4. versus fiscal policy and the budget deficit
   
   
3. Exchange rate intervention, eg to stimulate exports
4. Monitoring of asset prices
5. Promotion of Johannesburg as a financial centre

This first brief looks at the current role and responsibilities of the Bank.

Core responsibilities

The Bank, in the pursuance of its primary goal, the realisation of its business philosophy and the fulfillment of its responsibilities, assumes responsibility for:

• formulating and implementing monetary policy in such a way that the primary goal of the Bank will be achieved in the interest of the whole community that it serves;
• ensuring that the South African money, banking and financial system as a whole is sound, meets the requirements of the community and keeps abreast of international developments;
• assisting the South African government, as well as other members of the economic community of southern Africa, with data relevant to the formulation and implementation of macroeconomic policy; and
• informing the South African community and all stakeholders abroad about monetary policy and the South African economic situation.

Monetary policy

The South African Reserve Bank conducts monetary policy within an inflation targeting framework. The current target is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis. The Bank has a floating exchange rate policy and there are no exchange rate targets. The increased move internationally towards the establishment of integrated financial regulators has caused central banks to focus more on financial stability through macroprudential analysis. The SARB regards “the achievement and maintenance of financial stability”, in the broad sense of the word, that is, including monetary and financial system stability, as its primary goal.

Financial stability

Financial stability can be described as the absence of the macroeconomic costs of disturbances in the system of financial exchange between households, businesses and financial-service firms.

Have your say!

Use this post to comment on, or make suggestions about any aspect of the financial system in South Africa.

Topical: What should the mandate of the South African Reserve Bank be?

Aspects to be considered:

• Monetary policy and inflation targeting
• Monetary versus fiscal policy and the budget deficit
  
• Promotion of economic growth and employment
• Exchange rate intervention, eg to stimulate exports
• Monitoring of asset prices
• Promotion of Johannesburg as a financial centre

Having determined the targets, what instruments can the Bank use?

Press opinion: If the debate is real, it's dangerous

The ANC's decision to review the mandate of the Reserve Bank

Ever since the balance of power shifted in the tripartite alliance, President Jacob Zuma has been careful to be seen to allow the expression of diverse opinions on economic policy, particularly from the ANC's two formal allies, trade union federation Cosatu and the SA Communist Party. After all, no harm can be done by talking about things - or can it?

When finance minister Pravin Gordhan presented his first medium-term budget policy statement in October, he was able to talk tough on spending (which the ANC's allies always want more of) because of the expected fall in tax revenues and the sharp rise in the projected budget deficit. But he seemed to compensate by saying that "alongside inflation reduction and financial stability, we must seek faster development and employment creation. I welcome public debate on this issue." Gordhan also said he had agreed with Reserve Bank governor Tito Mboweni and governor-designate Gill Marcus that "monetary policy should also support our aim of balanced and sustainable growth".

So what exactly can it mean to say that the Reserve Bank mandate will be reviewed? What more is wanted?

It's true that the Bank regards its primary goal as "the achievement and maintenance of price stability". It also maintains that SA "has a growing economy based on the principles of a market system, private and social initiative, effective competition and social fairness".

There's a lot there that can be assumed to be ideologically provocative to the SACP (which, not surprisingly, still believes in communism) and Cosatu (which remains committed to socialism). But what would they change? Would they say that price stability (and therefore the control of inflation) should not be the primary goal? Do they reject the role of markets?

The policy of inflation targeting tends to inflame tempers on the Left, but it has not been rigidly applied. While there are arguments for raising the target band from its present 3%-6%, to abandon the concept would send a signal that inflation is to be encouraged. Quite apart from its other destructive effects, on both the economy as a whole and on investor confidence, high inflation would be a terribly punitive tax on the poor and the aged. That is the last thing we need in a country where so many are unemployed and so many survive on meagre social grants and old-age pensions.

Yet Cosatu and the SACP do not want play-play discussions and they will not enjoy being thrown sops. The "review" of the Bank's mandate should be seen for what it is: an attempt to change economic policy through the back door.

Extracted from Financial Mail editorial

Press opinion: Time for Marcus to follow the US's lead

So Gill Marcus says the Reserve Bank won't intervene in the currency market, even though everyone in power acknowledges that the strong rand is draining SA's export earnings by the day.

Lower earnings mean that more jobs have to be cut and hence consumer spending falls. Squeezed profits also translate into lower tax receipts and thus less money for government to spend. It's a rotten circle that's hard to fix.

Apologists for the Reserve Bank's hands-off approach say that if the bank is seen to be subtly trying to manipulate the foreign exchange market, the big global speculators will have a field day. The rand will be fair game for short-selling and governor Marcus will run out of ammunition to defend it long before the likes of George Soros have finished mopping up their profits.

Others, who mainly come from the left but lately include a number of high-profile mainstream economists, say SA's hardline monetary policy is self-defeating. Miners and manufacturers are bleeding money and shedding jobs as a result of it, and sticking to the same old line isn't going to make things any better.

They say the orthodox mandate of a modern central bank - to manage inflation within defined limits - is outdated. It's surely time to include within the bank's ambit the explicit imperative to wrench the economy out of recession. And if this requires the rapid depreciation of the currency, too bad.

We might as well take our cue from the mighty US. The Fed has committed itself to keeping interest rates at record-low levels until at least the latter part of 2010. By printing bakkie-loads of cash and lending it cheaply to investment banks, so they can drive up the traded prices of listed assets, the Fed has stimulated at least some form of economic activity. Everyone hates the likes of Goldman Sachs, but at least the banks are generating taxable earnings.

The second effect of the Fed's weak-dollar policy has been to shore up the balance sheets of America's exporters. There has been a renewed flow of money into US-based multinationals that earn substantial amounts of hard, non-dollar currencies from their offshore operations.

The most pertinent result of the cheap-money policy to us as an emerging market has been to push down the worth of the dollar. It has enabled traders to borrow dollars for next to nothing and invest them for fat yields in places with high interest rates, like SA. This demand for rands has driven our currency to a level that makes it painful for our exporters (the stronger the rand, the more expensive and less competitive their products become on the open market).

We have to ask why SA is stubbornly bucking the global trend by keeping its interest rates high and therefore inviting the carry-traders to keep buying rands - with all the collateral damage that entails. It's time to forget inflation targeting; it has caused too much pain already.

The world will be operating in a low-interest rate environment for at least the next 12 months. SA should make a bold effort to join the global recovery efforts. Cut the repo rate to 6%, let the rand weaken to R10/$, and at least try to reap some windfalls before they disappear altogether.

Source: Sunday Times