gill marcus : has monetary policy independence been undermined? address by ms gill marcus, governor of the south african reserve bank, to the 1926 rand club, johannesburg, 30 november 2010. * * * introduction we are nearing the end of a difficult year, a year that began with so much promise but is now ending on a note of high uncertainty. on the global front, the expectations of a normalisation in the advanced economies were proved to be wrong, and indications are that low growth and accommodative monetary policies are likely to be sustained for some time. this has contributed to the strength of the rand exchange rate as capital continues to flow out of the advanced economies in search of higher yields. domestically, growth has also disappointed. however the strong rand has contributed to the more benign inflation environment which, along with a persistent negative output gap, has contributed to lower interest rates. during the year there has been a focus on issues relating to monetary policy independence in response to the letter from the minister of finance clarifying the mandate of the bank, as well as the recent new growth path document, in which reference was made to a looser monetary policy stance. there are perceptions that these documents have undermined the independence of the bank, and there has been a tendency to over - interpret monetary policy actions in terms of these discussions. for example, when the repo rate was reduced at the previous meeting, some analysts argued that because there was no economic rationale for this move, it therefore must have been politically inspired. a few days later, when the disappointing growth figures were announced, these analysts conceded that our decision was vindicated on economic grounds. there are some who believe that any reference we make to growth or unemployment is an indication that we are not independent enough. at the same time there are elements in society who believe that we are too independent and that the goals of monetary policy should be changed. in my talk this evening, i will state the bank ’ s perspective on these issues and then briefly review our monetary policy actions over the past year. monetary policy independence in discussing the issue of monetary policy independence, it is useful to distinguish between goal independence and instrument or operational independence. the former refers to the setting of the objectives of the central bank, while the latter relates to the actual implementation of the mandate that is given to the bank. it is generally accepted that the goal of monetary policy should be set by the elected representatives of the country. but even here choices are constrained by what monetary

became apparent that the authorities responsible for macroeconomic policy had neglected their regulatory role. it is now widely recognised that inadequately framed and enforced rules, what are now widely called governance problems, and an inadequate regulatory structure underpinned the crises in the countries that once earned the title of the asian tigers. from this conclusion, it is obvious to see why the international monetary fund ’ s reaction was to focus on regulatory reform in the aftermath of the crisis, and significantly, this focus continues today. the most recent example is turkey, where an economic crisis has highlighted the pressing need for the restructuring of state banks, a point the authorities are taking in hand and acting upon. the rules monitored and enforced by both the central banks and the competition authorities are amongst the key pillars of the regulatory framework which are necessary to ensure the effective functioning of an economy. the competition authorities and the financial regulators are mutually responsible for regulating the structure of markets and the behaviour of the market participants. while we both respect the markets, we also realise that, like all other institutions, they require clear and predictable rules for their effective functioning and they require an agency that is able and willing to enforce those rules. the criteria that we use in our regulating function naturally diverge because our immediate objectives are different. but many of the features that are essential to the effective functioning of a central bank are equally necessary for an effective competition authority. 3. pre - requisites for effective functioning two of these shared features are technical competence and independence. anybody who has worked in a regulatory agency – be it a central bank, a competition authority or a sector regulator – will recognise the immense technical complexity of the work these agencies undertake. we need to attract the kind of staff and inculcate the kind of ethos that produce work of the highest technical quality. if our decisions are to provide certainty to investors and confidence to the society at large, they must be rooted in solid and reliable data reinforced by cutting edge analysis. the pressure to produce state - ofthe - art regulation is intensified by the fact that regulators should never imagine that one rule, or one mode of interpretation, is good forever. regulators work in a dynamic and rapidly evolving environment and their work and policies must be able to reflect this. regulators must ensure that their rules are respected but they must take care not to become too rule - bound, and in so doing lose sight of the purpose served by the rules. it is relatively easy to provide either certainty or flexibility : to provide both presu