t t mboweni : transparency and the public understanding of monetary policy address by mr t t mboweni, governor of the south african reserve bank, at the annual banquet of the institute of bankers, johannesburg, 6 march 2001 * 1. * * introduction good evening ladies and gentleman. i thank you for inviting me here this evening to speak at this prestigious event. the institute of bankers is an important organisation and encompasses an industry that is, as i am sure you are well aware, crucial to the south african reserve bank as a partner in our commitment to maintain and enhance the stability of the country ’ s financial sector. my remarks this evening centre on " transparency and the public understanding of monetary policy ". the public understanding of what we aim to do at the reserve bank is something that concerns us deeply. it is something that should go hand in hand with the work of the bank and it is central to the bank ’ s commitment of making monetary policy transparent to the people affected by it – the citizens of south africa. first i will discuss the reserve bank ’ s monetary policy framework and the developments that have occurred in this area recently. i will then move onto the institutional arrangements for the conduct of monetary policy, the work of the monetary policy committee and the bank ’ s modelling and forecasting activities. finally, i will say a few words about the central objective of the south african reserve bank. 2. the monetary policy framework we announced the adoption of the inflation targeting monetary policy framework in february just over a year ago. the formal adoption of an inflation targeting framework indicated a shift from the previous informal policy framework. in the past, monetary policy had embraced an eclectic approach in which recognition was formally given to a medium to longer - term stance of monetary policy by monitoring developments in a number of financial aggregates and not only money supply and bank credit extension. the eclectic approach to monetary policy was applied during the 1990s, against the background of explicitly articulated guidelines for money supply growth. this framework recognised that the reserve bank had to combat inflation, as outlined in the constitution and the reserve bank act. however, since the bank ’ s policies had their most direct impact in the area of money and credit, intermediate guidelines were set for growth in money supply. it was argued that if money supply growth could be contained, too much money would not be chasing too few goods, and inflation would be brought under control. while formally it was stated that broad money supply growth should fall in the range of 6 to 10 percent

that stable conditions prevail in the financial sector when there is a high degree of confidence that the financial institutions and financial markets are able to meet their contractual obligations. these stable conditions, however, do not preclude the failure of individual financial institutions. a financial institution can fail and be allowed to fail even under stable financial conditions. it is only when there is the threat of systemic risk and an important part of the financial sector is at risk that the situation can be described as financially unstable. since inflation is our main focus, you may question where the exchange rate of the rand fits into the monetary policy framework? targeting inflation does not mean that the exchange rate of the rand is ignored. on the contrary, the impact of the exchange rate on inflation is what concerns us and this is what we closely monitor. the impact of the fluctuations in the exchange rate on inflation is carefully considered when we go about the daily task of managing domestic liquidity and determining the repo rate. if signs do emerge of increased inflationary pressures arising from a depreciation of the exchange rate of the rand, in the absence of any other counterveiling factors referred to above, then monetary policy would have to respond in the appropriate way. this, however, does not imply that the reserve bank will defend a specific level of the exchange rate. 3. institutional arrangements for monetary policy our commitment to transparent monetary policy goes hand in hand with the attempts we have already made in communicating both our intentions and the outcomes of our meetings to the public. the monetary policy committee was set up shortly before south africa adopted the inflation targeting framework for monetary policy. the 14 - member - mpc, as it is known in short, meets seven times a year. it first met on 13 october 1999. the task of its meetings is to decide on the monetary policy stance, with a focus on the inflation targets that must be met in the target year. a press conference is held after the two - day meeting has been concluded and the committee releases a statement fleshing out the developments in the international and domestic economy and the reasons for its monetary policy stance relating to these prevalent developments. the reserve bank has also convened monetary policy forums, which as the name suggests, provide a forum for open discussions on monetary policy and general economic developments. the mpfs are held twice a year in the major centres of the country and engage with labour, business, community and other organisations. the forums also ensure that the views of interested parties are taken into account when