The global crisis and monetary policy

In South Africa, there has been considerable focus on inflation targeting. The debate has generally revolved around the impact of monetary policy on domestic growth. Globally, there has also been a renewed focus on inflation targeting, but for very different reasons.

The argument put forward by, amongst others, Bill White, formerly of the BIS, argues that inflation targeting contributed to the global crisis precisely because it was too successful. The period of the 2000s was one where global inflation was low and, in terms of the narrow focus on inflation, it meant that central banks could keep interest rates at very low levels.

These low interest rates, the argument goes, led to excessive credit extension and asset bubbles in the housing and equity markets, and to the lending excesses that ultimately caused or exacerbated the crisis. In other words, by focusing too narrowly on inflation, monetary policy ignored the financial stability implications of low interest rates.

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.