The independence of South Africa’s Reserve Bank is not undermined by new economic growth proposals unveiled by the government last week, Governor Gill Marcus said on Tuesday.
In a speech posted on the central bank’s website, Marcus also said it was not always possible to achieve low, stable inflation, a competitive exchange rate and low interest rates at the same time.
Marcus reiterated that the central bank, which has cut interest rates by 650 basis points since December 2008, with the latest 50-basis point reduction put in place earlier this month, had limited scope to lower them further.
South Africa released a “New Growth Path” document outlining proposals to jump-start the economy, which stated monetary policy would continue to target low and stable inflation but do more to support a more competitive exchange rate and reduced investment costs through lower real interest rates.
“The bank’s view … is that the independence of monetary policy is not undermined in the New Growth Path proposals,” Marcus said on Tuesday.
“Our mandate remains the attainment of low and stable inflation, and to the extent that other policies and micro-economic interventions are supportive, we will have greater flexibility in the conduct of monetary policy.”
Under pressure
The Reserve Bank has come under pressure from the government’s labour union allies to cut interest rates more steeply to help boost the economy after last year’s recession, and to aggressively intervene to curb strength in the rand currency, seen undermining the key manufacturing sector.
“It is not always possible to achieve the goals of low and stable inflation, a competitive exchange rate and low real interest rates simultaneously,” Marcus said.
“There are unfortunately times when conflicts between these objectives will arise, and the bank should be in a position to act independently, in line with its constitutional mandate, when such a situation arises.”
Marcus however conceded that the central bank’s independence was not absolute, saying monetary policy was not impervious to the needs of the economy.
The new growth plan recognised that intervention in the foreign exchange market was not a simple solution as this was expensive and not necessarily effective.
But further intervention was not ruled out and was consistent with the Bank’s activities in the foreign exchange market. – Reuters