daniel mminele : monetary policy implementation – the impact of the changing regulatory landscape on the policy transmission mechanism address by mr daniel mminele, deputy governor of the south african reserve bank, at the rand merchant bank ficc research macro forum, cape town, 31 may 2012. * 1. * * introduction good morning and thank you to rand merchant bank for inviting me to what has certainly been an enlightening morning. the topic i have been asked to address you on is a very interesting one from a central bank policy perspective, and relates to an area of our work in central banking which is still evolving, and the real impact of which remains uncertain. the two speakers before me provided some interesting insights around the fiscal and political dynamics locally, both areas which in the international context carry a fair share of the responsibility for the current sovereign debt crisis and financial market stresses. it seems quite appropriate to round off the day with a discussion on monetary policy, which has been playing an increasingly central role in recent years, given the limited, and in some cases, exhausted fiscal space, and a seeming lack of political will to meaningfully resolve the crisis. the result of this has been an unprecedented expansion in the demands on monetary policy, which necessitated an enlargement of the toolkit in a manner that one would have thought impossible only a few years ago. however, as we know, all actions have consequences, and while central bankers in many ways can be credited with coming to the rescue when fiscal policy no longer could, there are many challenges going forward, not least of which remains the illusion of unlimited intervention1 and potential for moral hazard, when to exit from these unconventional measures and ultimately how best to exit without creating another crisis. it seems we keep returning to this question of “ exit ”, only to get derailed again by a further upset or deterioration in the global environment. in my remarks today i will touch on the costs of an unstable financial system and developments around macro - prudential policies, before i discuss the impact of regulatory changes on the transmission mechanism. 2. the costs of an unstable financial system the economic and social costs associated with an unstable financial system are well known. fiscal policy went to extraordinary lengths to try and secure the stability of the real economy and the financial system, but in so doing, was sowing the seeds of the sovereign debt crisis. to remedy the situation in europe, harsh austerity measures were implemented in order to put public finances on a sounder and more

funding ratio calculates the proportion of long - term assets which are funded by long term, stable funding. bis central bankers ’ speeches qualitative impact, it is not possible to measure it at this stage, while the impact will differ according to each country ’ s initial conditions. these are the issues which central banks are grappling with today and the challenges they present for the conduct of monetary policy going forward. the new basel requirements do not suggest that there needs to be any changes to the south african monetary policy implementation framework, unless we change the operating framework from the current classical cash reserve system to an overnight targeted rate framework. south africa ’ s money markets are not yet sufficiently developed to potentially justify a change from the current classical cash reserve system operating framework to an overnight target rate framework. this segment of the market needs to be developed much more, and this forms part of the on - going work at the bank in consultation with market participants such as the money market subcommittee of the financial markets liaison group. thus, at least over the medium term, the monetary policy implementation framework in south africa is unlikely to be affected by these regulatory changes, however, they will have an impact on the monetary policy transmission mechanism and therefore on monetary policy and interest rates and need constant monitoring. 5. conclusion in conclusion, the global financial crisis has forced a rethink about monetary policy and financial stability, resulting in new macro prudential frameworks. the consequences thereof are still unknown but could have significant implications for the conduct of monetary policy and the institutional set up of central banks. what is certain is that the operating procedures of central banks will become much more complicated, with a much wider variety of tools available. i thank you bis central bankers ’ speeches