Central banks not immune to global developments

Friday, March 2, 2018

While the recovery from the global financial crisis is on track, the end of high global liquidity will impact on capital flows, creating challenges for central banks at a time when their political independence is being questioned, says Reserve Bank Governor Lesetja Kganyago.

“The recovery itself is expected to bring about new challenges for the emerging markets in particular. It is inevitable that monetary policy normalisation in the advanced economies will happen, and that the era of high global liquidity will come to an end. The impact on capital flows and global financial markets will create particular challenges for central banks at a time when political independence is being questioned,” said the Governor.

Speaking at the National Asset and Liability Management Conference in London on Friday, Kganyago said the vulnerabilities of countries will differ but that emerging markets in general appear to more resilient in the face of the recent market volatility.

“Their macroeconomic fundamentals and policies have improved, making them a better-placed to weather the storm than was the case five years ago,” he said.

On the issue of independence, the Governor said central banks need to foster the political consensus that underpins independence.

“This requires even greater transparency and accountability than in the case of monetary policy. Central banks also need to have the courage and political backing to make tough calls. There is always the danger that unhappiness with central bank actions in the financial-stability field could undermine the credibility and legitimacy with respect to their core mandate of price stability,” he said.

He said the issue of independence can also be related to central bank balance sheets, which were brought under greater scrutiny in the wake of the global financial crisis.

Kganyago said it is generally agreed that central banks should not be too concerned about incurring losses or making profits on their balance sheets.

“These should be regarded as part of the broader government budget constraint. Central banks do not have a profit motive but act in the broader interest of the economy. However, central banks that incur continuous losses may ultimately require recapitalisation by government and may consequently bring themselves under greater political scrutiny.”

Such issues could divert from their core mandate, he said, adding that the Reserve Bank has recorded losses for five consecutive years from 2010. The losses were mainly attributable to reserve-accumulation activities.

“As capital flows to the emerging markets expanded as the search for yield intensified, many central banks attempted to ameliorate the impact on their currencies by buying reserves. In South Africa’s case, we stepped up reserve accumulation – not to influence the currency, but rather to add to what we considered to be a suboptimal level of reserves,” said the Governor. - SAnews.gov.za

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