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Crunch time for Reserve Bank
MONETARY POLICY
IT'S crunch time for the Reserve Bank as it faces a political attack on its status quo. The finance department has recently announced moves toward government-determined inflation targets as the cornerstone of monetary policy. More worrying for the Bank is a move by Parliament to revisit its current structure and reporting lines. The Bank is still unconvinced of the benefit of explicit inflation targets - proposed by Finance Minister Trevor Manuel in the Budget - but it has conceded that its money supply guidelines have not been effective. Finance director-general Maria Ramos says: "At present we are merely talking with the Bank about the pros and cons of inflation targeting. We are far from discussing details." She is adamant, though, that monetary policy (mainly interest rate policy) needs to be guided by indicators "that are more focused on the outcome of monetary policy, such as variance in consumer prices". Bank Governor Chris Stals said last weekend that SA was not yet ready for inflation targets. But he said the bank would strive to bring inflation down to the 1% to 5% of the economies of its major trading partners. Money supply would remain its main policy guideline, he said. Fears that the debate over inflation will lead to a rift between the Bank and finance department are unfounded. "Any inflation target government sets up will have to be approved by the Bank and fit in with its constitutional mandate, namely the protection of the currency," Ramos says. But while the inflation debate is unlikely to rock the monetary apple cart, the forthcoming report on the Bank by a parliamentary finance committee could do so. It is headed by a known critic of the Bank's tight monetary stance, Ben Turok. Members of the committee have said they want a "closer relationship" between Parliament and what they see as an aloof central bank. "The point of departure of our committee was that Parliament only has formal relations with the Bank," Turok says. "We feel the time has come to re-examine this relationship." He would not be drawn on the recommendations to be tabled next month. But Turok stressed that it needed to be clarified "who sets monetary targets and who decides policy". An option widely mooted is the establishment of a monetary policy committee (MPC) to help the Bank implement inflation targets, replacing the committee that comprises the Bank's governor and three deputies. The proponents of an MPC point to the success of this committee at the Bank of England. But, warns DP finance spokesman Ken Andrew, also a member of the parliamentary committee: "Before the MPC the Bank of England was directly responsible to government. Now it has achieved greater independence. The opposite would apply here as the Reserve Bank already has great autonomy. Anything that looks like we're moving towards greater political interference would be extremely damaging to investor confidence," warns Andrew. The Reserve Bank has come out against an MPC unless staffed by monetary experts without outside interests and seconded to the Bank. ý See page 23 and page 1 of BT Appointments
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