The role of the South African Reserve Bank

The role of the South African Reserve Bank in domestic financial markets Presentation to the Standing Committee on Finance 19 November 2009 Mr AD Mminele Deputy Governor South African Reserve Bank

Outline § Introduction § Implementation of monetary policy § Accumulation and management of fx reserves § Other activities of the SARB in the financial markets § Communication

Introduction

The mission of the SARB 1. The Bank’s primary goal is the achievement and maintenance of price stability, in the interest of balanced and sustainable economic growth. 2. The achievement of price stability is underpinned by the stability of the financial system and financial markets, therefore, the Bank actively promotes financial stability.

Monetary Policy Framework 1. SARB is not goal independent but enjoys full operational/instrument independence 2. Inflation target: 3% - 6% for CPI 3. Flexible FX regime 1. SARB MPC determines policy rate 1. SARB’s refinancing system is its main mechanism for implementing monetary policy in South Africa

Implementation of monetary policy

The transmission mechanism of monetary policy 1. The repo system was introduced in March 1998 and refined in 2001, 2005 & 2007 2. The SARB uses the repo rate as the policy rate 3. The repo rate reflects the SARB’s stance on monetary policy and ultimately influences banks’ marginal cost of funding 4. Interest rates of all banks are adjusted when the repo rate changes 5. Changes in the repo rate impacts directly on lending rates, prices of other financial assets and eventually the inflation rate

The SARB’s refinancing system Cash-reserve requirement on banks + Liquidity shortage in the money market Open-market operations: - NT deposits at SARB - SARB debentures - Reverse repos - Foreign exchange swaps - Bond sales - Corporation for Public Deposits (CPD) Refinancing at the repurchase rate Banks’ lending and deposit rates C; I; S; X; CPI; GDP; EMP; etc…

Factors influencing liquidity Examples of factors expanding liquidity 1. FX purchases by the SARB 2. Payments by the SARB 3. Decline in the amount of outstanding OMOs 4. Decrease in notes and coin in circulation 5. Losses on maturing FX contracts 6. Decrease in cash reserve requirement 7. Government payments 8. Decline in CPD deposits with the SARB Examples of factors draining liquidity § FX sales, e. g. to NT foreign payments § Increase in outstanding SARB debentures & reverse repos § Increase in cash reserve requirement § Maturing government bonds in SARB’s monetary policy portfolio § Any payments from the government/market to SARB § Increase in notes and coin in circulation § National Treasury sterilisation deposit account

Mechanics of the SARB’s refinancing procedures 1. Main repo conducted weekly on a Wednesday 2. SARB announces weekly range and average for week ahead 3. Bids are allocated in full (within reason) 4. Subject to: eligible collateral, haircut, marked-tomarket, margin calls 5. Eligible collateral broadened to incorporate bonds of parastatals

Mechanics of the SARB’s refinancing procedures 1. In addition to the weekly repo, banks have access to the following: 1. Utilisation of cash reserve accounts (CRA) 2. Standing facilities automatically available at repo ± 50 basis points 3. Supplementary square-off at repo rate at SARB discretion on an exceptional basis 4. Fine-tuning is conducted if daily estimates breach ranges

Liquidity management by the SARB

Liquidity requirement ranges and amount allotted

Accumulation and management of foreign exchange reserves

Reserves Management 1. Since 1998, the Bank started to reduce the NOFP, which finally turned positive in May 2003 2. February 2004 - SARB’s oversold forward book closed out 3. October 2009 - the gross official foreign exchange reserve position of the SARB amounted to USD 39, 8 billion 4. Syndicated loans reduced to zero over time, borrowed reserves currently USD 350 million

Official gold and foreign exchange reserves

Reserves Management 1. Reserves are invested against benchmarks selected to encapsulate the risk/return profile of the SARB 2. Objectives: 1. Capital preservation – controlling risk to preserve capital 2. Liquidity – timely availability of resources 3. Enhance returns within acceptable risk parameters 3. Combination of internal and external fund managers are used 4. Kept in three tranches – buffer, liquidity and investment tranches

Impact of the SARB’s foreign exchange transactions on liquidity 1. SARB purchases FX for two reasons: 1. to accumulate reserves, and 2. on behalf of government and clients 2. Purchases of FX expands money-market liquidity 3. To maintain monetary policy stance, liquidity has to be sterilised via OMOs 4. SARB also conducts FX swaps to smooth moneymarket liquidity

Other activities of the SARB in the financial markets

Other activities of the SARB in financial markets Financial Markets Department • Conducts bond and Treasury bill auctions on behalf of government • Surveillance over primary dealers in government bonds • Manages the investment portfolio of the CPD • Banker to government • Lender of Last Resort • Compiles and publishes South African benchmark overnight rate for deposits (Sabor)

Other activities of the SARB in financial markets National Payment System – ensures an efficient and effective payment and settlement system so as to reduce risks and ensure that transactions are conducted smoothly Exchange Control – responsible for the day-to-day administration Bank Supervision & Co-operative bank supervision – responsible for bank regulation and supervision in South Africa so as to ensure that the banking system is sound and efficient and that the interest of the depositors of banks and economy as a whole is protected

Other activities of the SARB in financial markets Financial Stability – responsible for assessing the stability and efficiency of the financial system, formulating and reviewing appropriate policies for intervention and crisis resolution, and strengthening the key components of the financial system Subsidiaries of the SARB: South African Bank Note Company – manufactures bank notes of behalf of SARB South African Mint Company – manufactures coins on behalf of SARB

Communication

Communication with the market 1. The Bank communicates and interacts with financial market participants in various other ways including: 1. Daily contact with bond and fx markets 2. Money Market Liaison Group 3. Statement on gold and foreign exchange reserves 4. Speeches by executives 5. Meetings with domestic and international investors 2. The SARB also works closely with the National Treasury on market communication as part of policy co-ordination related to reserves management, debt management and financial market developments

Thank you