Marcus explains focus on growth

In a post-crisis world, growth and employment have become the main concern of most central banks, according to Reserve Bank governor Gill Marcus.

But this did not imply a change in the bank’s mandate, she said at the Gordon Institute of Business Science earlier this week. And it was “consistent with a flexible inflation targeting framework such as we have in South Africa”.

Reserve Bank governor Gill Marcus says the bank's concern for growth and employment objectives does not imply a change in its mandate of ensuring price stability. Photo: Leon Nicholas. Credit: Independent Newspapers

The central bank’s mandate is to ensure price stability – and inflation targeting is the mechanism used. The bank aims to keep inflation between 3 percent and 6 percent and adjusts interest rates to do so.

Flexible targeting allowed the bank to take into account other objectives, such as growth and employment, Marcus said. And she described “strict targeting”, which excludes other objectives, as “a theoretical construct”.

She said: “In reality, no central bank acts in this way.”

She was responding to criticism from “those who believe we have gone beyond our mandate by focusing on growth”.

Before 2007 the world had a period of strong growth and low inflation and price stability was the “overriding objective.”

All this changed when the US credit bubble burst and, after Lehman Brothers collapsed in 2008, central banks played a pivotal rescue role. In many advanced economies key interest rates were cut close to zero and huge doses of liquidity were pumped into the system.

South Africa’s banking system proved to be far more stable and did not require such remedies. However, the repo rate has been at a 30-year low of 5.5 percent since November 2010, despite inflation now inching above the target range.

Marcus explained why: “Concern for the state of the economy can result in deciding on a longer time horizon for achieving the inflation target, to minimise the negative impact on output growth.´”

She noted that, since the crisis, the economy’s growth rate had been below 3.5 percent. This gave room for more stimulus without stoking inflation.

At a separate event, Reserve Bank deputy governor Daniel Mminele spoke yesterday of “uncharted territory”, referring to the demands now being made on central banks to ensure financial stability.

In many countries, including South Africa, central banks are not only responsible for monetary policy but also for banking regulation and supervision. The collapse of banks in many countries brought this role sharply into focus.

Reforms made under the Basel 3 agreement will affect South African banks. Though they are well within the capital requirements, they will have problems meeting the liquidity requirements because they rely largely on short-term wholesale deposits to fund their long-term loans.

Mminele warned of unintended consequences of the standards. Unable to achieve longer-term deposits without increasing the cost of funding, South African banks would be forced to reduce their lending.

“This will most certainly have negative consequences for economic growth and employment creation,” Mminele said.