Cosatu's demands to ANC

Trade union federations wants gold mining companies nationalised, tightening of foreign exchange rules, says Reserve Bank should resist rand appreciation and states the SARB's primary role should be job creation

Cosatu called on Tuesday for a reversal of measures taken to relax exchange controls and for taxes on short-term capital flows.

The positions laid out in an economic policy paper put pressure on the ruling African National Congress to reconsider its foreign exchange and economic policies when it holds a major strategy setting session next week.

"Due to relaxation of capital controls, (company) profits were repatriated in the form of dividend payments ... The outflow of funds increased South Africa's dependence on short-term capital flows to finance expenditure," it said.

Gordhan defends SA’s inflation-targeting and flexible exchange-rate regimes

According to Reuters, Finance Minister Pravin Gordhan yesterday defended the South Africa’s inflation-targeting framework in a written statement to parliament. Gordhan said “Our inflation-targeting framework has proved itself in the past as a valuable signal for credible policy”, saying that it provided investors with “confidence in times of crisis” and “flexibility for the Reserve Bank to respond appropriately during a crisis”.

The minister also reiterated the country’s desire to maintain a flexible exchange-rate stance, saying “The flexible exchange rate also acts as a buffer against shocks and helps to reduce the volatility of interest rates”. Alluding to the fiscal debt problems in Europe, Gordhan said that policymakers would remain “committed to managing risks in an uncertain global environment that included fiscal problems in some European countries”, while at the same time remaining “committed to maintaining macroeconomic and financial stability through supportive and responsible fiscal and monetary policy”.

Should central banks persist with inflation targeting?

The crisis has triggered vigorous and wide-ranging debate on the role and responsibilities of central banks and raises three big questions:

Should central banks persist with inflation targeting? In the years before the crisis there was a powerful intellectual consensus in favor of inflation targeting—that is, basing monetary policy on achieving a target inflation rate, usually consumer prices. Even where central banks did not target a precise inflation rate, their policy objectives were informed, if not dominated, by price stability. This approach seemed successful. There was an extended period of price stability accompanied by stable growth and low unemployment. In the world before the crisis, central bankers were a triumphant lot. The unraveling of the Great Moderation has diluted, if not dissolved, the consensus around solely targeting inflation. The mainstream view before the crisis was that price stability and financial stability reinforce each other. The crisis has proved that wrong: price stability does not necessarily ensure financial stability.

Xolile Guma, Senior Deputy Governor, SA Reserve Bank

Xolile Guma has been appointed senior deputy governor of the Reserve Bank

... The meltdown in Greece contains two lessons for South Africa, he says.

"One is that fiscal policy does matter. If you don't rein yourselves in you can expect a crisis to occur at some point in the future.

"Secondly, it says something about the benefits of a flexible exchange rate. Those who chose to go into a fixed exchange rate within the euro area effectively gave up one policy instrument.

Reform ahead for South Korean central bank

Price stability is no longer a sufficient target for central bank policy, according to South Korean central bank governor Kim Choong-soo. “Perceptions as to the desirable role of the central bank are now shifting greatly,” he said at a speech commemorating the 60th anniversary of the bank.

Changes ahead for the Bank include expanding its remit to include financial stability; fostering closer ties with other central banks; and calling in consultants to help with the restructure. A key task was to work out how the goal of financial stability would fit with the “prime” goal of price stability.

In what seemed a message to other central bankers, the governor underlined the need for an international response to future crises. He spoke of the “drive for international policy co-operation” and international discussions on a “global financial safety net”. Even large foreign exchange reserves would not safeguard South Korea from international crises, he said. Expect a more outward-looking central bank in the months and years ahead.

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.
  

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.

Marcus sees “advantages” of flexible inflation-targeting regime.

Speaking at a conference in Cape Town yesterday, SA Reserve Bank Governor Gill Marcus reiterated the Bank’s monetary policy stance as a “flexible” inflation targeter.

Stressing the need for a low and stable inflation rate in order to limit the negative impact on the poor, Marcus also said that “the advantage of flexible inflation targeting is that it sets out clear goals for monetary policy as well as public accountability”. The Governor once again communicated that while the mandate of the Reserve Bank was to target inflation, she said that monetary policy would be conducted in such a way that it is in the “best interest of sustainable development and growth”, stating that there are some instances where it may be appropriate to miss the target (due to exogenous shocks).

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.

Interest rate cut next week?

The rand’s rally to a 2½ -month peak against the dollar has raised the odds of an interest rate cut at the Reserve Bank’s policy meeting next week, although most analysts believe rates will be kept steady.

Comments yesterday from one of the Bank’s deputy governors, Renosi Mokate, who spoke about the effect of capital inflows on the rand, added to the speculation.

The rand has appreciated more than 3% since the last monetary policy committee meeting (MPC). It was trading at R7,29 to the dollar late yesterday after touching R7,27/ earlier in the week, its firmest since January 5.

Extremely low interest rates in developed countries were prompting investors to put their money into emerging economies to take advantage of higher yields, she told a leadership conference.

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.

Nene: Inflation targeting will remain

Excerpt from the Address by the Deputy Minister Of Finance: Nhlanhla Nene on the impact of the budget on the transformation of the economy, 5 March – Bull Nose Maponya Mall Soweto

Sound policy foundations
... 
Part of South Africa’s success over the last decade can be attributedto the stabilising influence of the Reserve Bank’s inflation targeting policy. This policy will remain in place, although we will establish and maintain an open dialogue on this policy stance with our social partners. Part of this dialogue will no doubt require the Reserve Bank to demonstrate that inflation targeting necessarily takes into account a broad set of factors such as growth, employment and exchange rates. Price stability is important to people who have an income that cannot be augmented by other means when things go bad. Keeping inflation low is also an important part of ensuring a competitive real effective exchange rate, but this alone cannot raise our productivity. Competitiveness is driven over time by improving skills, reducing the costs of doing business, more efficient logistics systems and higher investment ...

The policy debate resumes

Following calls for the nationalization of the mines and ultimately much else, there was the Presidential indication that nationalization was not government policy.

Clearer was the green light given to Trade and Industry to resurrect the old import-substitution policies linked to infrastructure and other state procurement opportunities, with much of manufacturing apparently targeted in the process and suggestions of nearly three million decent (formal) jobs these next ten years.

Once the Finance Minister had reconfirmed inflation targeting as a policy, the target of 3%-6% and SARB independence, with a letter written to the SARB Governor requesting that the state of the economy at all times be flexibly taken into account in policy deliberations, there followed another explicit public call from the ranks of labour for the abolition of inflation targets and their substitution by employment targets.

An alternative to inflation targeting?

There could be a better alternative to inflation targeting, which became all the vogue among central bankers in the last two decades but now has doubters. Rather than target a rate of inflation, as is now custom, target a level of prices.

Price level targeting, its proponents say, would give central banks more flexibility to respond aggressively to downturns and crises without sacrificing their inflation fighting credibility. When inflation undershoots during a recession, it would allow the central bank to run the economy hot and allow inflation to overshoot for a while in a recovery.

Many central banks now target a rate of inflation. The Federal Reserve, for instance, has an informal goal of 1.5% to 2% inflation over the long run [3% to 6% in South Africa]. Targeting became popular in the 1990s and 2000s because central bankers felt it helped build their inflation fighting credibility, which anchored expectations for future inflation, kept interest rates low and helped to keep the economy robust and stable.

Marcus happy with rates brief

Reserve Bank governor Gill Marcus has welcomed instructions from Finance Minister Pravin Gordhan to consider growth and employment in setting interest rates.

Gordhan spelt out the nuance he would be looking for in a two-page letter to Marcus this week.

"It's a fine balance that needs to be there and I think this mandate letter sets it out very clearly and it's most welcome," Marcus said.

Zwelinzima Vavi, general secretary of the Cosatu labour federation, told Business Times: "We are extremely disappointed in the statement on inflation targeting."

2010 Budget Speech: Monetary policy and the exchange rate

Excerpt from 2010 National Budget Speech: Monetary policy and the exchange rate

Mister Speaker, monetary and exchange rate considerations are also important elements both in adapting to global developments and in creating an environment supportive of growth and employment creation.

Let us remind ourselves about what Section 224 (1) of the Constitution says about the mandate of the Reserve Bank:

The primary objective of the South African Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic.

As required by the Constitution, the Bank should pursue its mandate independently and without fear, favour or prejudice. The Governor and I will consult regularly to ensure that South Africa is prepared to respond with agility and flexibility to changing economic circumstances.

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.

Daniel Mminele, Deputy Governor, on inflation targeting

In a recent speech on monetary policy, Daniel Mminele, discussed inflation targeting:

Section 224 (1) of the South African constitution, from which the Bank gets its mandate, describes the primary objective of the South African Reserve Bank as being “to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic.” Therefore price stability is core to the mandate of the Bank. However, it is clear that price stability is not an end in itself, but in the interest of balanced and sustainable growth. It follows then that, as far as the constitutional mandate is concerned, both economic growth and by implication employment, need to be taken into account when making decisions on monetary policy. To give effect to these constitutional imperatives, the Bank has been mandated by government to maintain low inflation within an inflation targeting framework. This framework is a means to achieve the objective. It is not an end in itself.

We note the current debates around the appropriateness of our mandate and questions about how that mandate is executed.

COSATU welcomes Minister’s pledge to address inflation targeting

The Congress of South African Trade Unions welcomes Finance Minister Pravin Gordhan’s commitment to address the South African Reserve Bank’s inflation targeting policy when he unveils the national budget.

He said: “We are talking, working, thinking, reflecting, interacting with the key stakeholders from within the government and listening to the voices from outside and will inform South Africa where we intend to go on February 17th”.

COSATU and its allies have argued strongly for a change in the SARB’s mandate, so that its Monetary Policy Committee has to take regard of broader national priorities – particularly economic growth and job creation – rather that a narrow concern only with inflation targeting.

This policy has resulted in excessively high interest rates over a long period, which has imposed unnecessarily heavy burdens on both individual consumers and businesses, and caused thousands of workers to lose their jobs.

Cosatu's opposition to inflation target leaves the poor cold

While inflation targeting generates sound and fury among trade union officials and some politicians, the general public find the topic a bore. This emerges from interviews by TNS Research surveys with 2 000 adults from seven major metropolitan areas.

The survey in September last year showed only 20 percent of people disagree with inflation targeting as a policy while 42 percent "don't know" their views. "While knowledge of the policy improves with wealth and education there is still widespread confusion. It is clear the policy is a mystery for many," said TNS director of innovation and development Neil Higgs.

Among the poorest sections of the population, 59 percent had no view, while 42 percent of the middle section and only 23 percent of the wealthy said the same.