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Tollgate player cleared of frau... New bill leaves industry with a three-ti... Indian Ocean countries largely isolated ... Africa rings in the changes in informati... Big Mac index finds rand undervalue... Lubombo plan lays trail from SA's Hluhlu... Stals proud to be unpopular if it means ... |
Stals proud to be unpopular if it means low inflation
The governor is not getting carried away by recent good news, writes CIARAN RYAN
This is in response to pleas from a growing number of politicians, trade unionists and business leaders for lower rates to stimulate economic growth and job creation. "The only way we can reduce interest rates is by creating more money," says Stals. "We would enjoy the benefits for a few months, but would then have to raise interest rates to even higher levels to put the brakes on inflation. I accept that our restrictive approach to monetary policy may not be popular, but the Reserve Bank is constitutionally bound to protect the value of the rand. "We cannot court popularity for the sake of short-term economic gains." Progress had been made in bringing the SA financial system into line with its overseas counterparts, most recently through the introduction of the repurchasing agreement (repo) system. There is growing pressure to involve outsiders in setting monetary policy along the lines of the Bank of England's monetary policy committee (MPC), which includes four non-central bankers. SA's monetary policy is set by Stals and his three deputy governors. "We could change the composition of our committee to include non-bankers," says Stals, "but as the Bank of England discovered, these would have to become full-time Bank officials." There is also a danger non-Bank MPC members would represent vested interests to the detriment of the country. Stals says SA is not ready for inflation targeting, as practised in some developed countries. The Reserve Bank currently targets money supply growth as an indirect means of controlling inflation, and without much success - private sector credit expansion is still running at an annualised rate of about 14% a year. Inflation targeting requires the co-operation of the central bank, business, trade unions and government, which must live within narrowly defined budget deficits. "Overseas experience shows you should not move to inflation targeting unless you have a relatively free financial system," says Stals. "This would mean doing away with foreign exchange and other controls, though I believe we should move to this system in due course. "As we globalise the economy, we must accept global inflation rates as the norm." On the macro-economic front, there is no shortage of good news: consumer inflation is down to 5.4% from more than 10% in early 1997, producer inflation is down to about 2.5%, total foreign reserves are now R43-billion against a low of R10-billion in November 1996, the rand is relatively stable and the current account deficit is within manageable levels. The key economic challenges are job creation and continuing the war against inflation. Despite several years of positive growth, jobs continue to be destroyed, an unavoidable consequence of globalisation and productivity improvements. "Although our productivity has improved by more than the increase in real wages, our competitors are improving productivity at a faster rate. So even though we are making good progress, we are losing ground to other countries." According to the World Economic Freedom Report, those countries with consistently low inflation tend to experience sustained and above-average growth. "We could reduce consumer inflation from the current 5.4% to zero by raising interest rates, but it is doubtful whether the country could stomach the pain over the short term. In the longer term, the foundation would be laid for much stronger economic growth than we are currently experiencing. "Part of the problem is that the country is going through a period of transition. One of the reasons for the growth in money supply is the expansion of the formal banking sector, as more and more people with fixed incomes qualify for formal sector credit. "SA is a complex society, where past disparities must be addressed and major reforms and adjustments are required. We need to get through these reforms as quickly as possible." Stals says the recently introduced repo rate system is not working as well as he would like, despite a drop in the repo rate from 15% to 14.91% in recent weeks. This is because the Reserve Bank is still regarded as a lender of first resort to some commercial banks, signalling a communication blockage in the inter-bank market - in which commercial banks with surplus funds lend to those with shortfalls. Rather than borrowing from each other at prevailing money market rates, the banks have tended to satisfy their daily funding needs through the repo system. The Reserve Bank has improved the communication flow between the banks by publishing the aggregate cash reserve surplus held by the banks on a daily basis. Already there are signs that this has improved efficiency in the inter-bank market. The banks' aggregate surplus dropped from R2-billion two weeks ago to R79-million this week, a sign that banks are now borrowing from each other first, before approaching the Reserve Bank. Under the repo system, the Reserve Bank makes available the estimated daily funding requirement of the commercial banks, which set the repo rate by tendering for these funds. Under the previous Bank rate system, the rate was set by the Reserve Bank rather than the market. If the commercial banks are unable to satisfy their needs through the daily tender, they can borrow at the marginal lending rate, which is set at 16% to penalise over-reliance on the Reserve Bank. "Under the previous system, there was no real incentive for the banks to borrow from each other," says Stals. "There is evidence of improved efficiency, but the marginal lending rate is perhaps not high enough to act as a disincentive."
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