t t mboweni : central bank independence speech by mr t t mboweni, governor of the south african reserve bank, at the reuters forum lecture, held in johannesburg, on 11 october 2000. * * * “ independence signifies ignoring pressures, whatever its source. the independence of central banks goes,... beyond independence from political, executive and legislative power. for me it also equates with independence from private or collective economic interests, autonomy versus the short term, frequently imposed by capital markets and, finally, freedom of action vis - a - vis the monetary policy of other central banks. ” prime minister lionel jospin. paris, may 2000. 1. introduction i am extremely pleased at this invitation to present this inaugural address in the reuters forum lecture series. this is an important initiative and i wish you well for the sustained success of this lecture series. we have chosen to discuss the issue of central bank independence since the topic is both current and highly significant. incidentally when the banque de france organised their bicentennial celebrations in may this year, they chose the topic of central bank independence as the theme for the colloquium. at the said banque de france colloquium, the prime minister of the french republic, monsieur lionel jospin remarked that : “ the increased power and influence of central banks, the greater visibility of their role and their leaders, have inevitably focused attention on their role, their efficiency, the principles underlying their actions and, in some cases, their place in the democratic way of life. ” central banking is of cardinal importance in any country because of the legal right normally granted to central banks to create money. this money can serve as a means of payment, a unit of account and a store of value. one of the important issues immediately arising after granting this right to a central bank, is whether this function should fall under the ultimate control of the executive branch of government - the cabinet and its administrative departments - or whether parliament should leave this responsibility to be freely executed by an independent, autonomous powerful institution run by unelected people. 2. advantages of an independent central bank the traditional argument in favour of a strong, independent central bank is that the power to spend money should in some way be separated from the power to create money. numerous episodes in the world ’ s economic history testify to a government ’ s potential abuse of its power to create money. around the third century ad in the roman empire, for instance, the silver

over the instruments that affect the inflation process, including in particular the prevention of any direct financing of government deficits ; and ( iv ) financial independence, which requires the central bank to have access to adequate financial resources of its own and full control over its own budget. 5. legal and operational procedures in south africa the legal framework may provide an important foundation on which independence can be built, by giving clearly defined tasks to the central bank and demanding compliance in carrying out those tasks. by the early 1990s, when south africa ’ s constitution was being drafted, central bank independence had already become a fairly widely accepted element of sound central banking in the international debate. this acceptance was shaped by the dismal experience of the many countries that had suffered high inflation in the 1970s and 1980s. both the interim and the final constitution of the republic of south africa therefore provide for an independent central bank. section 224 ( 2 ) of the constitution states very clearly : “ the south african reserve bank, in pursuit of its primary object must perform its functions independently and without fear, favour or prejudice, but there must be regular consultation between the bank and the cabinet member responsible for national financial matters. ” in operating within this legal framework, the reserve bank has indicated that its primary goal in the south african economic system is the achievement and maintenance of financial stability. the bank believes that it is essential that south africa has a growing economy based on the principles of a market system, private and social initiative, effective competition and social fairness. it recognises, in the performance of its duties, the need to pursue balanced economic development and growth. in the pursuance of its responsibilities, the reserve bank assumes responsibility for : ( i ) assisting the government, as well as other members of the community of south africa, in the formulation and implementation of economic policy ; ( ii ) formulating and implementing monetary policy in such a way that the primary goal of monetary policy will be achieved in the interest of the whole community ; ( iii ) ensuring that the south african money, banking and financial system as a whole is sound, meets the requirements of the community and keeps abreast of developments in international finance ; and ( iv ) informing the south african community and all interested stakeholders abroad about monetary policy generally, and the south african economic situation in particular. as is well known, south africa adopted a formal inflation - targeting framework for monetary policy in february of this year. time does not allow a long discussion of this framework. however, it may be noted