Political independence of the South African Reserve Bank: Managing interest rates

Abstract

Purpose: The purpose of this article is to determine whether the South African Reserve Bank (SARB) is politically independent and able to operate without undue external influence.

Problem investigated: The SARB is under increasing pressure to shift its monetary policy stance in order to boost the country’s competitiveness. Whether external demands have compromised its independence at times has been the subject of debate.

Methodology: The study comprised a literature review and econometric analysis of the Bank’s independence. Movements in interest rates were used as an indicator of dependence. The analysis was between actual interest rates in South Africa over the past two decades, and a model of what interest rates should have been during this period, with reference to Taylor’s Rule. Differences between the two were assumed to expose shortcomings in the direction of South Africa’s monetary policy and therefore some degree of dependence.

Findings and implications: Movement of the two sets of rates correlated, which suggests SARB independence. The findings did not reveal harmony between the levels of the two sets of rates. However, the latter correlation was not the focus of this study.

Originality and value of the research: This study makes an important contribution, as few authors researched the relationship between interest rates and the SARB’s independence scientifically. The study is well timed as the SARB’s independence debate has reached concerning levels.

Conclusion: The results suggest almost no level of dependence – which does not necessarily imply that the SARB is entitled to reject all external input, but rather that it can prioritise its objective of price stability over other concerns.