The South African Reserve Bank

The International Monetary Fund (IMF)

South Africa was a founding member of the IMF at its inception in 1944. The major functions of the IMF include surveillance of the global economy and of member countries, providing liquidity to countries that may experience balance-of-payments problems, and technical assistance to countries on request. The Reserve Bank participates in the biennial meetings of the IMF as well as in various IMF initiatives to enhance IMF surveillance. This includes the IMF’s financial sector programmes.

The Bank for International Settlements (BIS)

The BIS is an international organisation which fosters international monetary and financial cooperation. It also serves as a bank for central banks. South Africa is a shareholder of the BIS and the Reserve Bank is an active participant in the bi-monthly meetings of Governors. These meetings aim to promote discussion and policy analysis among central banks. The Bank is also a member of various BIS committees which monitor, and develop policy on, central bank activities. Currently, the South African reserve Bank serves on the following Committees: the Basel Committee on Banking Supervision, the Committee on Payments and Settlement Systems, the Irving Fisher Committee on Statistics, the Internal Audit Committee and the Central Bank Governance Network. The South African Reserve Bank joined the BIS in June 1971.

Committee of Central Bank Governors (CCBG) in the Southern African Development Community (SADC)

The creation of the CCBG in SADC was approved by the SADC Council in August 1995.  The main reason for the establishment of the CCBG was the need for a specialised body in SADC to promote, and achieve, closer co operation among central banks within the Community.

The CCBG deals with, among other things, the development of well managed financial institutions and markets, closer cooperation among central banks in the areas of monetary policy and monetary policy instruments, bank supervision, money and capital markets, payment, clearing and settlement systems and training.

Since its inception, the Governor of the Reserve Bank has acted as Chairperson of the CCBG. A Secretariat for the CCBG, hosted by the South African Reserve Bank, was created in November 1995. The CCBG plays a crucial role in particular, in the promotion of financial and economic development, by way of pursuing policies that enhance financial and macroeconomic stability.

Inflation Targeting Framework

South Africa formally introduced inflation targeting in February 2000, after announcing the intention to adopt the framework in August 1999. Prior to adopting the inflation-targeting framework, the Bank had adopted a number of frameworks. Between 1960 and 1998, these included exchange-rate targeting, discretionary monetary policy, monetary-aggregate targeting and an eclectic approach.

Inflation targeting is a monetary policy framework in which the central bank announces an explicit inflation target and implements policy to achieve this target directly. One of the features of an inflation-targeting framework is the greater degree of transparency it brings to monetary policy.

Inflation targeting has been adopted in a number of countries. The choice of the target varies across countries. Some countries have opted for target ranges in specifying their inflation targets, while others prefer a point target or a point target combined with a range. The trade-off in this regard is essentially between the simplicity of a point target and the degree of flexibility for absorbing shocks outside the control of the authorities which a target range allows.

It is acknowledged that monetary policy cannot contribute directly to economic growth and employment creation in the long run. However, by creating a stable financial environment, monetary policy fulfils an important precondition for the attainment of economic development.

Monetary Policy Committee

In monetary policy decision-making processes, committees are preferred above individuals. Not one central bank has replaced a committee with a single decision-maker, a fact that has both theoretical and empirical support; the ability to draw diverse viewpoints from constituent members in committees ensures that there is likely to be some moderation of extreme positions and policies and more even policymaking.

South Africa is part of this trend and the decision on the appropriate monetary policy stance is taken by the Monetary Policy Committee (MPC). This committee was constituted shortly before South Africa adopted the inflation-targeting framework. The MPC meetings are chaired by the Governor of the Bank. It consists of eight members of the Bank: the Governor, three deputy governors and four senior officials of the Bank.

Monetary Policy Communication

The Bank’s commitment to transparent monetary policy has resulted in several initiatives to improve the communication of its policies to the public.

At the conclusion of every MPC meeting, an MPC statement is issued through a press conference by the Governor of the Bank explaining the reasons for the MPC’s policy stance.  This press conference is broadcast live on national television and at  the same time the MPC statement is released on the Bank’s website.

The Bank also publishes its Monetary Policy Review (MPR) twice a year. This Review is aimed at broadening the understanding of the intentions and conduct of monetary policy. Moreover, the Review analyses the domestic and international developments that have impacted on inflation and motivates the monetary policy reaction to these developments. An assessment of the future outlook for the factors determining inflation as well as the Bank’s forecast of the future path of inflation is provided in the MPR. The Bank also publishes other material from time to time, to increase awareness and understanding of its monetary policy function.

Monetary Policy Forums (MPFs) are also convened by the Bank in order to develop a better understanding of monetary policy. These forums are held twice a year in the major centres of South Africa across all provinces, and representatives of the labour movement, business, government and academic institutions are invited to attend.

The inflation-targeting framework also improves the accountability of the Bank because it provides a yardstick that can be used to measure the Bank’s performance. The Governor of the Bank is required to submit annually a report on the implementation of monetary policy to the Minister of Finance. The Governor also appears regularly in Parliament before the Portfolio and Select Committees on Finance to explain the monetary policy stance adopted by the MPC.

Monetary Policy Implementation

The Financial Markets Department of the Bank is responsible for the implementation of monetary policy. The Bank has opted for a classical cash reserve system as a framework for its monetary policy implementation. In this framework an appropriate liquidity requirement or structural money market shortage is created by levying a cash reserve requirement on banks.

The main refinancing operation is the weekly seven day repurchase auction, which is conducted with the commercial banks, at the repo (policy) rate as determined by the Monetary Policy Committee. The Bank lends funds to the banks against eligible collateral, which comprises assets that also qualify as liquid assets in terms of the prudential liquid asset requirement.

In addition to the main repo facility, the Bank offers a range of end-of-day facilities for the commercial banks to square-off the daily positions on their settlement accounts, e.g. access to their cash reserve balances held with the Bank, supplementary repos/ reverse repos conducted at the repo rate and an automated standing facility whereby the end-of-day balances on the banks' settlement accounts are automatically settled at a rate of 100 basis points below or above the policy rate.

A range of open market operations are also conducted to manage the liquidity in the market in order to give effect to the Bank's monetary policy stance. The open market operations include the issuance of SARB debentures, reverse repos, the movement of public sector funds between the market and the Bank and the conducting of money market swaps in the foreign exchange market.

Regulation and Supervision

The Bank assesses on a continuous basis the stability and efficiency of key components of the South African financial system.

The Bank's approach to financial system stability places considerable reliance on market forces to achieve financial system stability.  Any intervention should, therefore, be at the minimum level needed to contain systemic risk.  Safeguarding of financial system stability requires adequate information about the behaviour of financial market participants, regardless of the institutional arrangements.

The prudential regulation and supervision of banks assist and complement the Bank in its pursuit of financial system stability.  It has, however, become increasingly clear that the financial system may be vulnerable as a result of inherent imbalances between the real and financial sectors of the economy.  Such vulnerabilities would not be revealed by the supervision of individual institutions.

For this reason the Bank and other central banks have gradually placed increased emphasis on macroprudential aspects of financial stability.  Financial system stability cannot be achieved by the Bank in isolation.  All financial system participants should act in ways that enhance the robustness of the financial system, which requires good and reliable information about trends and developments in the financial system.

Notwithstanding the best efforts of central banks and other regulators to detect and prevent instability, financial sector crises can still occur.  Under these circumstances the Bank liaises with the National Treasury and other regulators such as the FSB in planning and co-ordinating the responses of the authorities to alleviate the impact of financial crises on the real economy.

This includes the development and maintenance of safety-net policies and procedures, and the co-ordination of contingency planning for systemic crisis resolution.  The social cost of financial system failure usually exceeds the private costs, which justifies the role of central banks as the source of emergency liquidity assistance in times of banking liquidity problems.

Financial Stability

Monetary stability relates directly to the stability of the price level and the value of the currency.  The concept of financial stability is, in general, more controversial, less quantifiable and more difficult to define.  Several attempts have been made to come up with a generally acceptable definition.

What financial stability means in broad terms is: the joint stability of the key financial institutions and the financial markets in which they operate.  For financial institutions, this generally means that they are sound, i.e. that they have sufficient capital to absorb normal, (and at times abnormal) losses, and sufficient liquidity to manage operations and volatility in normal periods.  Financial market stability means less excessive and disruptive volatility, which should have positive real economic consequences.  In addition, financial stability would be evidenced by an effective regulatory infrastructure including the laws, regulations, standards and practices that constitute a robust financial regulatory environment.  Other elements that would add to financial stability are public confidence and an efficient process of macroprudential surveillance.

 

The concept of financial stability is most often thought of in terms of avoiding financial crises or managing systemic financial risk.  If systemic risk is managed well, that is, firstly by market participants through their private risk management, and secondly by the authorities through their banking supervision, market surveillance and systemic risk management, then systemic financial crises are less likely to occur, or will be more easily managed if they do.

One way of defining financial stability is in terms of the requirements to achieve it.  It requires a robust financial system, which may be defined as a system having the ability to prevent, predict and withstand shocks under all types of domestic and international market conditions. Financial stability can further be described as the absence of macroeconomic costs of disturbances in the system of financial exchange between households, businesses and financial-service firms.  Another definition used by some commentators is that financial stability is a sustained condition of stability in the financial system that ensures the efficient functioning of institutions and markets and low volatility in prices, interest rates and exchange rates.  When the whole or an important part of the financial sector is at risk, the situation can be described as financially unstable.

Financial instability would ultimately manifest itself through systemic risk, banking failures, intense asset-price volatility, interest and exchange rate volatility, and a collapse of market liquidity.  The disruption of the payment and settlement system could be a result of these manifestations.

Reserves Management

The official gold and foreign exchange reserves of the Republic of South Africa are held and managed by the Bank. The Financial Markets Department is responsible for the management of the reserves in accordance with the criteria set out in the Bank's Investment Policy and Guidelines.

Reserves play a key role in ensuring that the country will be able to:

    Cover its external operational needs;

    Service the country’s foreign exchange liabilities;

    Cover any foreign currency net imbalances in the balance of payments, and

    Maintain confidence in the country’s monetary and exchange rate policies.