South African Reserve Bank (SARB) on its Role & Functions

Meeting report

SARB Governor’s opening remarks
Gill Marcus, SARB Governor, stated that the South African Reserve Bank was held by shareholders, each shareholder was allowed to hold a maximum of 10 000 shares, with 2 million shares in issue. Each shareholder was entitled to one vote at the Annual General Meeting (AGM). This system was aimed at having broader public participation in the central bank and was unusual in the sense that most central banks were owned by the state.

SARB was an institution for the public good and though they made profits, this was not their main aim. The profits provided the resources for their work. SARB was the government’s banker. They also presided over the National Payment System.

The Governor referred to the global economic crisis and stated that, unlike the rest of the world, South Africa did not have a systemic banking crisis. This was because South Africa banks were very well capitalised and as a result the National Payment System held up very well.

On the liberalisation of exchange controls, the National Treasury determined the policy and SARB implemented it. The Bank Supervision Department was regulated under the Banks Act, but this department was within and responsible to SARB. This department also collaborated with the National Treasury and the Minister of Finance. The Governor commented that South Africa already had the kind of regulation that the rest of the world was still developing due to the effects of the global economic crisis. The Governor concluded by discussing the role of the Financial Stability Department, the Governor’s Committee and SARB Board.

Financial Markets: presentation
Mr Daniel Mminele, Deputy Governor: SARB, briefed the Committee on SARB’s role in financial markets, noting that SARB’s primary goal was price stability. He explained that SARB was goal dependent because government set their mandate. They were instrument independent because they could use the available instruments independently to achieve their mandate. He reflected on the flexible exchange rate regime. SARB’s Monetary Policy Committee (MPC) determined the repurchase rate or repo rate, as it is more widely known. This was SARB’s key policy rate and this was effective through the refinancing system. This worked by stipulating a minimum liquidity requirement for banks and allowing banks to achieve this by lending from SARB. He explained that this facilitated the transmission mechanism – the process by which changes in the repo rate filtered through the economy to affect prices.

The mechanisms of SARB refinancing policy were explained. This was achieved through the accommodation policies, mainly done through repo auctions every Wednesday. SARB also had mechanisms for refinancing, other than the weekly repo auctions. The Committee was briefed on SARB’s other responsibilities: liquidity management and reserve management, as well as the impact the supply of foreign exchange had on domestic liquidity.

Inflation Targeting: presentation
Mr Brian Kahn, Senior Deputy Head (Research): South African Reserve Bank introduced the presentation by outlining the outlook for global and domestic recovery. He commented on the 3-6% target band for inflation and noted the effects of food prices, transport prices and electricity prices on inflation. He noted that the underlying pressure of the Producer Price Index (PPI) on the Consumer Price Index (CPI) had dissipated. Under the evaluation of administered prices, he specifically noted the effect of petrol prices and electricity tariffs.

Mr Kahn presented the factors affecting inflation, how the MPC considered these factors, how they were used in SARB forecasting models and how this influenced the repo rate decision. He discussed the effects of some of the components of inflation forecasting: house prices, share price indices, public finance data and bank loans and advances by type.

Monetary policy in the medium term had seen South Africa’s monetary policy easing beginning in
December 2008. The forecasts consistently showed that CPI inflation was expected to enter the inflation target range on a sustained basis in the second quarter of 2010 and to remain within the target range until the end of the forecast period in the final quarter of 2011. However, the changing electricity price assumptions reversed this favourable trend somewhat in the later part of the forecast period. Of concern to the MPC was the fact that the central forecast remained close to the upper end of the target, so that relatively small shocks to inflation could result in a breach of the upper end of the target. Mr Kahn concluded that in the medium term, the main changes to exogenous assumptions related to the exchange rate and administered prices, particularly petrol and electricity prices.

Discussion
Mr M Swart (DA) commented that increased inflation affected the poor disproportionately more and was pleased with the inflation targeting policy. He asked what the effect of a full 45% increase by Eskom would be, as opposed to SARB’s assumption of a 25% increase in the electricity tariff.

Mr Kahn responded that it was relatively easy to calculate the first round effects on CPI of a 45% increase in the Eskom tariff. In the current forecast such an increase would place inflation outside the target range by the end of 2011. The second round effects on CPI were uncertain. There was no doubt as to the upward pressure on inflation. Notable, the impact on household discretionary income would be significant and this would impact on consumer spending and lead to wider economic impact. The impact reduced as the increase tended toward the forecast of 25%.

Mr M Swart asked if an investigation was planned into the link between the changes in the repo rate and the resultant changes in banks’ lending rates.

The Governor relied that there was a task team in place. SARB would follow-up on this investigation and release the report as soon as possible.

Mr N Koornhof (COPE) noted the ongoing debate about the SARB mandate and asked the Governor for her opinion on whether it was necessary to change SARB’s mandate.

Mr Z Luyenge  (ANC) referred to the review of SARB policy and wondered what had prompted this. He was particularly interested in the feasibility of change and whether this was prompted by the change in governor.

The Governor replied that SARB was open to a debate on the broadening of the mandate and open to understanding people’s concerns with the existing mandate. They had also discussed this with the Minister of Finance to look at what SARB would or could do. The Governor did, however, think that SARB should not pronounce on this matter now.

Mr S Swart (ACDP) asked for an indication of how the SARB mandate could be broadened and asked the Governor to clarify the case for such changes.

Mr S Swart pointed to calls for a stronger Rand and queried the degree to which SARB should intervene in the strength of the currency.

Dr P Rabie (DA) noted that the Democratic Alliance supported no intervention to protect the Rand and asked for SARB’s view on intervention to protect the Rand.

The Governor responded that intervention in the exchange rate - this was not a perfect rate. It was not SARB’s task or desire to determine an “appropriate” rate. The Bank would not do that. The rate was set by what happened in the market and there were implications for both a stronger and a weaker Rand. SARB looked at opportunities in the market to build reserves and to find resources for government’s needs. This was a considered decision because building reserves was costly. SARB acknowledged that a volatile currency had an impact and therefore wanted a more stable currency. They had this ideal in mind in the management of the economy.

Mr S Swart thanked SARB for the emphasis on flexibility in the inflation targeting policy. He asked how SARB would address the second round effects of repo rate/interest rate changes and to comment on inflation expectations going forward.

Mr T Harris (DA; Western Cape) commented generally that the flexible inflation targeting highlighted in the presentations were particularly of interest and asked whether SARB had established credibility for this approach since the introduction of flexible inflation targeting.

Mr Kahn responded that strict inflation targeting focused on inflation without concern for any other variables. This strict regime was theoretical and was not applied in practice. The decision was often based on how aggressively to react to changes to get back within the target band. SARB has aimed for moderate, rather than dramatic increases.

Mr Harris also commented on possible intervention in the value of the Rand by saying that varying strengths of the currency held advantages and disadvantages for the different players in the economy. He referred to the possible protection of the Rand in relation to SARB goal of price stability and asked how they justified the pursuit of these two seemingly incompatible positions.

Mr Harris referred to the lagged response banks had to the changes in the repo rate. He asked what tools banks had to manage that and whether this lag could disadvantage consumers.

The Governor responded that the banks followed the repo rate change on the same day and this had immediate effect. There was no legal obligation on banks to do this but they did so as part of the monetary transmission mechanism-required co-operation between SARB and the banks. The repo rate was a benchmark rate and it served as an indication of how banks set their prime-lending rate. Although banks adjusted their prime-lending rate, the real lending rate was also variable, depending on the characteristics of lending in individual cases.

Mr Harris asked SARB to comment on their previous decisions and whether these decisions exacerbated the current recession.

The Governor had no comment on the previous decisions of SARB and did not deem such a response appropriate.

Mr Harris referred to the National Treasury response to setting exchange controls and stated that the most damaging exchange controls were those imposed on the intellectual property of South African entrepreneurs. This had prevented South African entrepreneurs from selling their products on-line through systems like PayPal. He asked SARB to comment on this.

Mr Mminele responded that exchange control reform was the gradual liberalisation of exchange controls. The reform agenda was informed by consultations with SARB, given the input from relevant players about reducing red tape, nuisances and about how exchange controls increased the cost of doing business. They had aimed for interventions that did not introduce risk into the system, such as the opening of foreign bank accounts and limits to advance payments and payments into Customer Foreign Currency (CFC) accounts, specifically the 180-day rule. Policy makers were aware of these issues and this was a question of sequencing actions and continuing the gradual liberalisation programme.

Mr Z Luyenge (ANC) asked about the involvement of stakeholders and public participation in the decision-making process. He asked if SARB had a public participation process where the general public could give their input.

The Governor replied that public participation happened through representative bodies such as Parliament and NEDLAC. The Monetary Policy Forums invited members of the public to comment and SARB also had round table discussions. It was important to SARB to get people’s views. They also did visits to obtain input, but public participation was primarily done through organised institutions. The Governor was of the view that the more that could be done to enhance the engagements, the better off South Africa would be.

Mr Luyenge asked if SARB was a more of a corporate or a public service and how they linked up with the Auditor-General.

The Governor responded that SARB was neither corporate, nor strictly a member of the public service. SARB had a unique role. They were an institution that had many of the characteristics of a public company and a part of their auditing was done privately. Because they were the banker to government, part of their auditing was done by the Auditor-General. In terms of governance, they were as compliant as possible with the International Financial Reporting Standard (IFRS) and the King Report on Corporate Governance in South Africa 2009 (King III), but because of their unique role, they were unable to be fully compliant.

Mr Luyenge referred to the counterfeiting of bank notes and coins. He asked who manufactured bank notes and coins and what measures were in place to minimise counterfeiting.

The Governor responded that SARB had two subsidiaries (SA Bank Note Company and the SA Mint) for the minting of coins and the printing of bank notes. No one else was legally allowed to make currency. This was strictly regulated and controlled by SARB and by the two boards of the subsidiaries. This was as tightly managed as possible and SARB was reviewing whether there was room for tightening up procedure. If counterfeit did occur, it was unlikely that it originated from SARB subsidiaries. Counterfeiting was not that difficult anymore with the advances in technology and SARB needed to constantly look at ways to tighten up security around the currency to reduce counterfeiting. Counterfeit currency was usually quite visible and vigilance among the public was very important.
 
Ms Z Balindlela (COPE) referred to SARB’s involvement as part of the Bank for International Settlements, the Basel Committee on Banking Supervision, the G20 and other central banks. She asked if South Africa’s participation yielded benefits for the African continent.

The Governor responded that these engagements informed other SARB’s contributions on the continent. They facilitated reaching consensus on issues and provided opportunities for feedback to continental colleagues.

Ms Balindlela noted that securitisation was a vehicle for spreading risk in investments and asked what benefits such an approach had for South Africa.

Mr Mminele responded that securitisation was one of the innovations on financial markets and had varying levels of complexity. This had been part of the cause of the global economic crisis. The use of huge amounts of complex derivatives, a form of securitisation, was the source of many of the problems. South Africa had quite a large market for securitisation in 2007 but this had cooled down recently. The Registrar of Banks conducted a review of the type of securitisation South Africa banks were involved in and found that securitisation was generally well managed. In the course of the recovery he expected these instruments to be used, once more.

Mr Bloem commented that COPE fully supported the appointment of the Governor and that they valued her independence and the Governor could depend on their support.

The Governor thanked Hon Bloem for the support. She did, however feel that it was important to state that independence of mind did not mean opposition. The central bank operated in the interests of the country. The central bank exercised the independence of its decision, its independence of thought. It was important to draw the distinction between being independent and being opposed.

Mr D Montsitsi (ANC; Gauteng) pointed out that SARB had acknowledged that the proposed 45% increase in the electricity tariff would impact on inflation. In light of this, he wondered whether NERSA consulted SARB on the possibility of a 45% increase in Eskom’s tariff.

The Governor responded that SARB provided the data and the numbers and interacted through the National Treasury on these matters.

Mr Sogoni, Co-Chairperson, noted that the effect on inflation of food and non-alcoholic beverages had decreased recently and the impact of oil prices had increased and asked SARB to comment on this.

Mr Kahn responded that at one stage, food prices were the biggest contributor to inflation. This component had come down significantly. Food prices generally went through phases and this was largely due to international price trends and changes in weather conditions. At present the food price component of the CPI was pulling down the average inflation. Producer prices were also decreasing. SARB expected this trend to continue. This was good news for the system. The oil price indicators focused on the rate of the increase in prices, rather than the levels of prices. It was SARB’s view that the very low oil prices, recently, were unsustainable in the long term.

Mr Sogoni asked if SARB’s role was restricted to monitoring the economy. He also asked if there was ever a possibility that SARB would not be able to meet bids by banks, leading to a shortage of cash.

Mr Mminele responded that all transactions were balanced by the end of the business day and consequently, there would not ever be a shortage of cash. Banks were required to deposit 2,5% of their liabilities with SARB. This made banks dependent on SARB for lending and was the mechanism through which the repo rate worked. The system allowed for the individual banks to finalise their transactions at the end of each business day, so a shortage of cash was not possible.

Mr Sogoni noted that the deceleration of credit extension was mentioned. He wondered what the impact of the National Credit Act had been and whether this had been negative.

The Governor responded that the deceleration of credit was much more complex than it initially seemed. The National Credit Act and National Credit Regulator controlled matters surrounding credit extension to people who were not credit-worthy. People could not currently get loans through the banks because the National Credit Act is working. The NCA had also led to greater caution among consumers.

Mr Sogoni asked for a more detailed explanation of a “haircut”

Mr Mminele responded that in the refinancing process (when SARB lends to banks) SARB could not lend on an unsecured basis. The "haircut" referred to how SARB valued the banks' collateral. This valuation was done to account for the volatility in market prices and created a buffer and a margin of safety in the refinancing process. If the market fluctuated, the banks would have to post additional collateral or drain collateral – as the fluctuation demanded.

The meeting was adjourned.