The role of the South African Reserve Bank in domestic

financial markets

The role of the South African Reserve Bank in domestic

financial markets

Presentation to the Standing Committee on Finance

19 November 2009

Mr AD MmineleDeputy Governor

South African Reserve Bank

OutlineOutline

Introduction

Implementation of monetary policy

Accumulation and management of fx reserves

Other activities of the SARB in the financial markets

Communication

IntroductionIntroduction

The mission of the SARBThe mission of the SARB

The Bank’s primary goal is the achievement and maintenance of price stability, in the interest of balanced and sustainable economic growth.

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 FrameworkMonetary Policy Framework

SARB is not goal independent but enjoys full operational/instrument independence

Inflation target: 3% - 6% for CPI

Flexible FX regime

SARB MPC determines policy rate

SARB’s refinancing system is its main mechanism for implementing monetary policy in South Africa

Implementation of monetary policyImplementation of monetary policy

The transmission mechanism of monetary policy The transmission mechanism of monetary policy

The repo system was introduced in March 1998 and refined in 2001, 2005 & 2007

The SARB uses the repo rate as the policy rate

The repo rate reflects the SARB’s stance on monetary policy and ultimately influences banks’ marginal cost of funding

Interest rates of all banks are adjusted when the repo rate changes

Changes in the repo rate impacts directly on lending rates, prices of other financial assets and eventually the inflation rate

The SARB’s refinancing systemThe SARB’s refinancing system

Cash-reserve requirement on banks

Cash-reserve requirement on banks

++++Open-market operations:- NT deposits at SARB- SARB debentures- Reverse repos- Foreign exchange swaps- Bond sales- Corporation for Public Deposits (CPD)

Open-market operations:- NT deposits at SARB- SARB debentures- Reverse repos- Foreign exchange swaps- Bond sales- Corporation for Public Deposits (CPD)

Liquidity shortage in the money market

Liquidity shortage in the money market

Refinancing at the repurchase rate

Refinancing at the repurchase rate

C; I; S; X; CPI;GDP; EMP; etc…

C; I; S; X; CPI;GDP; EMP; etc…

Banks’ lending and deposit rates

Banks’ lending and deposit rates

Factors influencing liquidityFactors influencing liquidity

Examples of factors expanding liquidity FX purchases by the SARB Payments by the SARB Decline in the amount of

outstanding OMOs Decrease in notes and coin

in circulation Losses on maturing FX

contracts Decrease in cash reserve

requirement Government payments Decline in CPD deposits with

the SARB

Examples of factors draining liquidity FX sales, e.g. to NT for 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 proceduresMechanics of the SARB’s refinancing procedures

Main repo conducted weekly on a Wednesday

SARB announces weekly range and average for week ahead

Bids are allocated in full (within reason)

Subject to: eligible collateral, haircut, marked-to-market, margin calls

Eligible collateral broadened to incorporate bonds of parastatals

Mechanics of the SARB’s refinancing proceduresMechanics of the SARB’s refinancing procedures

In addition to the weekly repo, banks have access to the following:

Utilisation of cash reserve accounts (CRA)

Standing facilities automatically available at repo ± 50 basis points

Supplementary square-off at repo rate at SARB discretion on an exceptional basis

Fine-tuning is conducted if daily estimates breach ranges

Liquidity management by the SARBLiquidity management by the SARB

0

10

20

30

40

50

60

70

Sep

-08

Oct

-08

No

v-08

Dec

-08

Jan

-09

Feb

-09

Mar

-09

Ap

r-09

May

-09

Jun

-09

Jul-

09

Au

g-0

9

Sep

-09

Oct

-09

ZAR billions

Debentures Reverse repos CPD call with SARBGovt deposits CRA balance (RHS)

Liquidity requirement ranges and amount allottedLiquidity requirement ranges and amount allotted

5

7

9

11

13

15

17S

ep-0

8

Oct

-08

No

v-08

Dec

-08

Jan

-09

Feb

-09

Mar

-09

Ap

r-09

May

-09

Jun

-09

Jul-

09

Au

g-0

9

Sep

-09

Oct

-09

No

v-09

ZAR billions

Liquidity range Amount allotted

Accumulation and management of foreign exchange reserves

Accumulation and management of foreign exchange reserves

Reserves ManagementReserves Management

Since 1998, the Bank started to reduce the NOFP, which finally turned positive in May 2003

February 2004 - SARB’s oversold forward book closed out

October 2009 - the gross official foreign exchange reserve position of the SARB amounted to USD39,8 billion

Syndicated loans reduced to zero over time, borrowed reserves currently USD350 million

Official gold and foreign exchange reservesOfficial gold and foreign exchange reserves

-40

-30

-20

-10

0

10

20

30

401

99

4

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

USD billions

SARB forward position International liquidity positionGross gold and fx reserves

Reserves ManagementReserves Management

Reserves are invested against benchmarks selected to encapsulate the risk/return profile of the SARB

Objectives: • Capital preservation – controlling risk to preserve capital• Liquidity – timely availability of resources• Enhance returns within acceptable risk parameters

Combination of internal and external fund managers are used

Kept in three tranches – buffer, liquidity and investment tranches

Impact of the SARB’s foreign exchange transactions on liquidity

Impact of the SARB’s foreign exchange transactions on liquidity

SARB purchases FX for two reasons:

• to accumulate reserves, and• on behalf of government and clients

Purchases of FX expands money-market liquidity

To maintain monetary policy stance, liquidity has to be sterilised via OMOs

SARB also conducts FX swaps to smooth money-market liquidity

Other activities of the SARB in the financial markets

Other activities of the SARB in the financial markets

Other activities of the SARB in financial marketsOther 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 marketsOther 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 marketsOther 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 SARBSouth African Mint Company – manufactures coins on behalf of SARB

CommunicationCommunication

Communication with the marketCommunication with the market

The Bank communicates and interacts with financial market participants in various other ways including:

• Daily contact with bond and fx markets• Money Market Liaison Group• Statement on gold and foreign exchange reserves• Speeches by executives• Meetings with domestic and international investors

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 youThank you