south african reserve bank an address by francois groepe, deputy governor of the south african reserve bank, at the 60th anniversary celebration of the bank of ghana accra, ghana 18 august 2017 the changing role of the central bank in economic policy governor addison, distinguished guests, ladies and gentlemen. it is a great honour for me to address you on this auspicious occasion. thank you for the invitation. the bank of ghana has been operating for 60 years. much has changed over this period in terms of its role and operations. this is not surprising, as the historical backdrop in which central banks have had to operate has kept changing over the decades. central banks in the developing world often play a vital role in economic policymaking, but that role tends to change as the economy and financial markets develop and new institutional capacity evolves. this is true of many african central banks. similarly, in the advanced economies, the role and even mandates of central banks have come under intense scrutiny and challenge, and many have found themselves with broader mandates and a wider scope of responsibilities in the wake of the most recent global financial crisis. numerous roles have been assigned to central banks over the years, many of which do not have to be performed exclusively by these institutions and could also be page 1 of 12 carried out by others. apart from supporting state financing during times of crisis, two main functional roles have traditionally been at the heart of central banking : maintaining price stability ( subject to the monetary regime ) and maintaining financial stability. this includes crisis prevention and management and resolution as well as the promotion of financial development in the economy. how these roles have been interpreted and implemented and their relative emphasis, however, has continued to evolve over time in response to changing circumstances. today, central banks have many other functions, some of which have also evolved over time. in south africa, apart from the price stability and financial stability objectives, the responsibilities of the central bank include the printing of physical notes and coin, the regulation and supervision of the banking system, ensuring the effective functioning of the national payment system, and managing the foreign exchange reserves of the country. however, in the african context, central banks have had to take on other roles as well. this is partly due to a relative scarcity of skills and other resources in the context of pressing developmental needs. in some african countries, central banks have an explicit developmental role. in nigeria, for example, the central bank plays a significant role in providing finance to the agricultural sector. how multiple

central banks play in combatting inflation is clear - cut, but their role in financial stability is less so. this is because financial stability is multifaceted, and because not all aspects of financial stability are within the control of the central bank. in general, therefore, financial stability is a shared responsibility. while it has now been generally accepted that financial stability should be an explicit focus of policy, there is no complete unanimity about where this responsibility should lie and which instruments should be used. the debate has partly centred around the relationship between monetary policy and macroprudential policy. if interest rates are used for macoprudential policy purposes, it could result in potential conflicts between monetary and financial stability policies. an example is sweden, where the riksbank attempted to deal with a perceived financial stability risk of sharply rising house prices and burgeoning household debt by raising interest rates in 2010 – even though inflation was below target and the unemployment forecast was above the estimated long - run sustainable rate. this led to inflation falling well below the target and rising unemployment, forcing a reversal of the monetary policy tightening. one view, put forward by the bis and others, has argued in favour of using interest rates as a financial stability tool, but with policy focusing on the financial cycle. this would result in tighter monetary conditions in the event of excessive leverage, even if inflation risks were relatively low. the advantage of using interest rates is that it affects all parts of the financial sector, although this could be a disadvantage at the same time, as interest rates are seen to be a ‘ blunt tool ’, impacting on the cost of credit in areas where this is not desired. using the interest rate tool could also result in higher inflation variability. although there is evidence that raising interest rates page 7 of 12 can reduce leverage and reliance on short - term funding, some analysts have argued that the required levels could be prohibitively high and impact negatively on growth. others, however, have argued that these two policy objectives should be separated, with different tools applied to different objectives. lars svensson, for example, argues that monetary policy and financial policy are different and distinct policies that should be conducted independently and with different instruments, although each policy should take account of the other. 3 the well - known tinbergen rule suggests that there should be the same number of instruments as there are targets. if the same instrument is used for multiple objectives, conflicts could occur and trade - offs could be required. according to this view