Interview: Gill Marcus
What challenges does the SARB face in using interest rates to manage inflation?
GILL MARCUS: One challenge is that interest rates are most effective in containing inflation when it is driven by excess demand in the economy. Currently, domestic demand is relatively subdued, and most of the inflationary pressures are coming from the supply side, mainly from the lagged effect of exchange rate depreciation and food prices. Yet if we do not react to the deteriorating inflation outlook, it could unhinge expectations, and this in turn could result in higher inflation.
In making monetary policy decisions, we are very mindful of the state of the real economy and the growth outlook. Although monetary policy does not determine potential output, it can impact the amplitude of the cycle, so we can affect cyclical growth. In a flexible inflationtargeting environment we can balance this conflict in a number of ways, including being more tolerant of inflation at the upper end of the target band, and extending the time over which we bring it back within the band in the event of a breach of the target.
What measures can be taken to help shield the economy against volatility and capital outflows?
MARCUS: As with many other emerging market currencies, the rand is very sensitive to global developments. As the domestic financial and foreign exchange markets are relatively liquid and open, the rand is often used as a proxy for hedging emerging market risk, adding to volatility. Changes in risk perceptions have an impact on global capital flows. When the tapering of the US quantitative easing programme was first mooted in May 2013, most emerging market currencies depreciated markedly and long-term bond yields rose. These remained volatile as changing perceptions of the timing of tapering dominated the market until it began in January 2014. As tapering is now priced in, the focus of the markets is on the timing of the first policy rate rise in the US, and on the extent of tightening. Changing perceptions are likely to continue to affect capital flows to South Africa and other emerging markets, with implications for rand volatility. Given the country’s relatively low level of foreign exchange reserves, the scope for leaning against this volatility is limited.
What are the biggest challenges the banking sector faces in implementing the Basel III framework?
MARCUS: South Africa’s banking sector is struggling to comply with the requirements of the proposed net stable funding ratio (NSFR). The standards currently state that wholesale funding is treated as an unstable source of funding over the contractual life of a deposit under the NSFR, and this is likely to stress a bank’s liquidity coverage ratio (LCR). It is felt that the rules are too restrictive and that the dynamics of domestic liquidity are historically proven to be more supportive of wholesale deposits than the framework acknowledges. Wholesale funding reaches South African banks mainly through financial institutions whose liabilities are derived from compulsory savings and portfolio savings schemes, some of which have tax benefits. Cash deposits in banks, as part of portfolio composition restrictions, are restricted through both internal mandates at the fund/asset manager level, and under the pension funds laws. The cash system in South Africa is relatively closed through exchange control regulations, which means cash deposits leaving South African banks generally arrive at another. Interbank lending has historically taken place to balance cash in the system.
Despite supportive structural liquidity in South Africa, most banks have made determined efforts to compete with the wholesale sector for retail cash deposits, and to lengthen the term of these deposits, thereby complying better with the LCR and NSFR requirements. The SARB has also established a committed liquidity facility in support of the LCR. Nevertheless, through involvement in the Basel Committee for Banking Supervision, the SARB is appealing to have the circumstances of the South African system recognised in the regulatory framework through less stringent factors in the ratios.
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