Interview: Gill Marcus
To what extent is there scope for interest rate cuts while staying within the inflation target band?
GILL MARCUS: In taking interest rate action during a period of inflation, the main questions are what is driving that inflation and in what timeframe would it be possible to bring inflation back within the target band should it be exceeded. At the start of the global crisis in 2008, inflation was above target. However, the outlook for inflation was benign and at the same time the economy was heading for a recession. Therefore, we felt that it was an appropriate time to cut rates. But things have since changed and today we are seeing an unenviable combination of rising inflation and slower growth. A number of factors are contributing to inflation and further uncertainty. While there may be room for manoeuvre should we deem it necessary, we have to ask whether further easing rates will overcome the structural constraints to growth. At the same time, we want to make sure inflation expectations are well anchored.
How prepared do you believe South African banks are to meet Basel III commitments?
MARCUS: There is no decoupling from the global financial crisis. In this context, much effort is being made to assess what can be learned by the banking system to ensure that banks take responsibility and protect taxpayers in the event of further problems. While South Africa has been affected, we have not had to assist any of our banks or inject liquidity. Rather than using a light touch, we have been a strict regulator. The global regulatory regime is trying to introduce many things that we have already been doing for some time. The challenge we face is to evaluate what is being developed in advanced economies to solve their financial woes and make sure that these developments are applicable in South Africa and do not cause any unintended problems.
We have always insisted that our banks must be adequately capitalised. Our banks have higher capital requirements than the Basel III minimum requirements. The challenge we face, as do many countries, involves liquidity requirements and maturity mismatches – in particular, the net stable funding ratio (NSFR).
This does not stem from a lack of liquidity in the system, but from the structure of our banking system and the way the country saves; most savings are tied up in insurance and retirement funds rather than in banking deposits. To assist banks with meeting the liquidity coverage ratio, we have created a committed liquidity facility that allows up to 40% of their assets to be covered. However, the NSFR, which is due to be implemented in 2018, remains a challenge.
We have vigorously engaged with the Basel Committee on Banking Supervision on the impact of requirements designed for advanced economies on emerging markets, as they differ greatly. We are fully committed to meeting the Basel requirements, but there should be an allowance for not meeting certain criteria that are not applicable due to particular national circumstances. However, as Basel concerns risk reduction, why would we introduce additional risk by unnecessarily borrowing abroad? There are no one-size-fits-all solutions and discretion on a country-by-country basis is critical.
What factors are contributing to a growing outlook of inflation uncertainty?
MARCUS: Recently the depreciation of the rand in response to the widening deficit on the current account of the balance of payments has emerged as the main upside risk to the outlook for inflation.
Although beneficial for export performance, it poses an upside risk in terms of inflation. We are also concerned that high wage settlements, which may also undermine competitiveness, could result in a wage-price spiral. These factors, in addition to uncertainty over global oil and food prices as well as increases in domestic administered prices, have created a very challenging environment to work in.
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