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Should monetary-policy reform be implemented in the South African economic and political climate?

The ability of companies and households to adapt to the economic effects of COVID-19 has been increased because of the easing of monetary policy, which continues to support worldwide recovery by being accommodating and expansionary. Countries’ pace of recovery will differ, based mostly on the ability of central banks to maintain accommodative monetary policy for longer periods.

To sustain credit flow, ease monetary policy and support liquidity in important financial markets, central banks ought to use various traditional and unorthodox methods and develop well-defined policies to meet their goals of ​​sustained economic recovery. Monetary policies are strengthened when operational processes are adapted to the specific conditions in each nation. In 2020, the South African economy shrank by 7 per cent, and unemployment reached its highest level ever. This context means that COVID-19 was the worst shock to the country’s economy since the Great Depression of the 1930s. Although the economy continues to be fragile and the growth of sectors is inconsistent, South Africa has recovered more quickly than had been expected. ​​To guarantee sufficient liquidity in domestic markets, the South African Reserve Bank (SARB) has taken significant action in which financial organisations have offered companies and households regulatory capital relief.

Nevertheless, the recovery is at risk of greater instability, higher debt ratios and large fiscal deficits, ​​delaying the return to pre-pandemic output levels. This paper provides a brief analytical introduction to a set of reforms that would improve upon the status quo. It suggests that, in its current economic climate, South Africa must reform its monetary policy so the economic recovery can be sustained by expanding the monetary policy toolkit, keeping inflation low into recovery, and improving the central bank's independence and public accountability.


In 2000, The South Africa Reserve Bank (SARB) adopted a novel framework that concentrated on targets for consumer price inflation. However, SARB changed the target for headline inflation later in 2009. The South African Government sets and modifies the inflation target, so the Central Bank has no goal independence, although operationally independent in monetary policy. Therefore, to meet its inflation target, the bank may apply any practicable monetary policy tool.

Furthermore, the Monetary Policy Committee (MPC) briskly reduced the repurchase rate by 2.75 percentage points between March and July 2020 as it reacted to the shock of COVID-19 in the country. Lower borrowing costs for businesses and households have led to sustained credit extension and promoted recovery in the consumption of durable goods. Debt reduction burdens have been moderated by low-interest rates, increasing the real buying power of companies and households. Reduced borrowing costs resulting from the low-interest rates have been helpful to the government.

Nevertheless, monetary policy alone cannot reduce fiscal risk, nor can it increase the future growth rate of the economy. Such matters must be approached by introducing structural changes and sensible macroeconomic policies.

Policy Reforms

1: Expanding the monetary policy toolkit and keeping inflation low into the recovery.

Although monetary policy can be decisive in moderating financial problems, the government should encourage structural reforms and corresponding macroeconomic policies to increase the pace and inclusiveness of growth. While many of the previous policy recommendations and comprehensive diagnostic studies available for South Africa are based on limits of microeconomic development, there have been few studies that examine a comprehensive change in monetary policy. Structural reform is necessary if growth is to be restored as it would increase productivity, promote fiscal consolidation and set a lower inflation rate.

Restoring potential growth necessitates a broad monetary policy toolkit, as well as comprehensive improvement. In this coordination process, fiscal policy must move first by abandoning the real rate so monetary policy can react to weak growth. The exchange rate channel would increase its contribution to growth due to the improved coordination, helping the economy attain macroeconomic stability. South Africa’s competitiveness could be permanently and reliably strengthened by an inflation rate nearer to peer nations. Meanwhile, despite a poor fiscal outlook, the short-term disinflationary impacts of COVID-19 on the economy and global easing have created the conditions for a policy response that is both aggressive and temporary.

While expanding the scope of the central bank, several macroprudential policy changes must be implemented to support long-term private investment better. First, the bank’s macroprudential policy should be stronger. A review should be conducted into the definitions of high-quality liquid assets, and additional financial instruments should be included. Lending rates should not diminish the effectiveness of monetary policy. Therefore, capital requirements need to be measured. Structural reforms should supplement all these initiatives. It appears that South Africa has not yet implemented best practices to promote growth or create new jobs, both of which would relieve the high rates of inequality and poverty. Productive reforms would allow for expansionary macroeconomic policies, and these, in turn, would provide a short-term stimulus for stronger long-term growth in productivity.

The last approach of expanding the monetary policy toolkit that the South Africa Reserve Bank should adopt is to set medium or low short-term inflation. Recently, the inflation rate in South Africa has declined to conform to the declaration by the Monetary Policy Committee (MPC) of a distinct preference for the target range’s midpoint. Following the sustained moderation of the prior year, inflation must remain stable to support economic recovery. Even if inflation in the long term is expected to be higher, the market-based expectations for medium and short-term inflation should be somewhat easier while considering the riots in July 2021 that could have lasting effects on investor confidence and job creation.

2: Independence and Accountability to the Public.

As a result of pressure to adopt the inflationary monetary policy, it has become normal for central banks around the world to conduct monetary policy in ways that are proficient and independent of the government. Therefore, the Bank of South Africa’s autonomy regarding monetary control and currency should be respected. Therefore, it is necessary for the bank and the government to be in close contact and share their points of view.

The bank ought to tell the public the reasons for its policies and how the bank arrived at them. Immediately after each monetary policy meeting (MPM), the South African Reserve Bank should publish its decisions regarding monetary policy, such as its advice on money market operations and its opinions on financial and economic development. Furthermore, the Governor (The Chair of the Policy Board) should hold regular press conferences to explain such decisions. Independent and resolute leadership is necessary, along with accountability to the monetary systems. In its operations, leadership ought to observe the corporate governance protocols, including accountability to every stakeholder who is influenced by it.

It is essential to present the bank’s fundamental thinking and assessment on its conduct of monetary policy and developments of the economy and prices. This assessment should be performed clearly and appropriately to satisfy the bank’s accountability to the public. Furthermore, monetary policy operates through financial markets. Therefore, the effect of that policy will disseminate more easily if market participants understand the bank’s thinking more comprehensively.


The low inflation and stronger growth expected from supply-side reforms would raise economic capacity and alleviate the pressure on monetary policy. They would also help poor households, which tend to be hurt most by inflation. Although it is generally agreed that low inflation benefits an economy, there is frequent resistance to aligning inflation levels with competing nations. At its meetings in November 2020 and in January and March 2021, the SARB’s Monetary Policy Committee did not change the 3.5 per cent repurchase rate because the recovery has been gaining momentum. As analysed by Prinesha Naidoo––a financial journalist at Bloomberg––‘while the monetary policy committee unanimously voted to leave the benchmark interest rate at a record low 3.5% for a sixth straight meeting, the implied policy rate path of the central bank’s quarterly projection model now shows the repurchase rate at 3.79% by the end of 2021, compared with 4.07% at the previous MPC meeting’.

An alternative policy is to let the growth attain 3.8 per cent during 2021 since the output is not expected to return to its 2019 level until 2023. By normalising rates to close the real interest rate gap, inflation would slowly rise to the 4.5% midpoint of its target range by 2023. In addition, ‘fuel, electricity and administered prices present short-term risks to the outlook and the bank may have to remove accommodation if the risks materialise’.

Furthermore, the expanded monetary policy toolkit will accentuate greater flexibility in setting the inflation target while departing from a freely floating exchange rate to a more managed one. In the Central Bank’s general stabilisation policy, the new structure concentrates more on financial stability. ​​The new structure involves significant interaction between a traditional monetary policy that concentrates on price stability and a macroprudential policy, which emphasises financial stability, especially systemic risk management. Lastly, potential measures to influence capital flows directly as a further policy tool could also be applied, alleviating the risks to financial stability destabilising capital flows, and allowing a more independent monetary policy.

Despite improved macroeconomic results, the new structure must still be tested, especially in the post-pandemic era. In a post-liberalised environment, the durability of the recent fixing of expectations for inflation is not yet known because of certain unresolved structural matters. For example, persistent conflict regarding income distribution has, for a considerable period, weakened the stability of the labour market. Furthermore, the success of macroprudential tools has not yet been verified, although they have much potential. There remains a need to test the proposed monetary toolkit because of financial uneasiness and the potential for political pushback when measures become mandatory.

​​Nevertheless, more effort is required to increase monetary policy transparency and policy communication to the public. However, internal dynamics and additional weaknesses in the structure could be revealed by guaranteeing the bank’s independence and accountability to the general public which could lead to considerable changes in the governance framework. It is becoming difficult for the central bank to remain independent and accountable to the people because of the political pressure, even with high legal independence. In order to achieve a total restructure, the monetary policy decision-making body must focus more on communication and policy transparency to achieve significant improvements in policy outcomes.


Structural change must be facilitated in order to stimulate growth. It is important to support short-term economic recovery while conducting reforms to ensure greater long-term growth, even if regulatory limitation remains comparatively high. Reform ought to reduce the government’s high level of involvement in the economy. It should also lead to removing complicated regulations for permits and licences and obstacles to domestic and foreign entry and provide more protection to existing firms from competition from network industries and legal services. ​​The monetary policy reform offers the South African Reserve Bank an opportunity to clarify its message to the public regarding its monetary policy and the breadth of its mandate, keep and build upon the new policy tools that it has introduced, and streamline its operational procedures. With economic and financial circumstances likely to remain unpredictable for the foreseeable future, policymakers need to continue to be data-dependent when making policy decisions. As an emerging market country, South Africa’s potential effect on real economy results and monetary policy formulation remains an essential topic for discussion.

Further Discussion.

In 1999, Tito Mboweni, as the SARB Governor, represented a transition of the Central Bank leadership that accompanied South Africa’s return to the global economy. However, certain important challenges have been ignored in the monetary policy of this century’s first two decades. Politicians and trade unionists have argued that the Reserve Bank should do more to support the economy and lower the unemployment rate that’s at an all-time high. However, trading in the nation’s stocks and bonds demonstrates that investors are fleeing to other emerging markets where central banks have begun to tighten.

‘Foreigners have been net sellers of South African equities for 31 of the last 37 trading sessions through Wednesday, pulling $2.63 billion from the domestic market. Non-residents have also dumped the country’s debt, with outflows totalling $1.4 billion since June. Cumulative outflows from South African securities markets have now reached more than $7.69 billion this year. Portfolio flows are likely to remain negative until the government is roused from its inertia to enact the reforms it has long promised and take the measures investors are waiting for.’

-- Stephen Meintjies, the head of research at Momentum Securities.


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