The strength or weakness of the rand is always bound to twist knickers, ignite fires among some interest groups and trigger a declaration of war on the machinery of Reserve Bank. A friend (a retired central bank governor) once told me that good central bank governors cannot afford to have romantic rides and candle-lit dinners with political and other pressure groups. Never having been a central banker, I feel that a good governor can actually do the direct complete opposite: have romantic rides and candle-lit dinners, but at the end of the evening refuse to “come in for coffee”. That way the governor would have got the entire story of evening without the final incriminating evidence - the coffee trap! Eddie George (former Governor of the Bank of England) once joked that the ideal place for a Central Bank governor to live is in another country, far away from domestic politicians and the union bosses.
Leaving the jokes aside, the key question is: how much power the Reserve Bank of South Africa actually has in determining the value of the Rand? The recent calls by unions and other allied organisations for the Reserve Bank to “devalue” the Rand is a very idealistic position to take in a world whose economy is increasingly interlinked. As any economist will tell you, it is very difficult to implement a fixed exchange rate and at the same time maintain successful investment links with the rest of the world when one is as small a country like South Africa. One of the pillars of the confidence that has been built into the South African economy has been the entrenchment of the independence of the Reserve Bank; this is a pillar we cannot afford to dismantle.
How does monetary policy actually work? Whenever the Reserve Bank changes the official interest rate, the bank is attempting to influence the overall level of expenditure in the economy - an almost impossible task! When the amount of money we spend grows faster than the volume of goods and services produced, we get inflation. In this way, the Bank (through its Monetary Committee) use interest rates to control inflation. The Bank sets an interest rate at which it lends to financial institutions. This interest rate then affects the whole range of interest rates set by commercial banks for their own customers like you and I. Interest rate changes also affects the price of financial assets (like bonds and shares) and the Rand’s value compared to other major currencies. Therefore, lowering or raising interest rates, affects all forms of revenues and expenditures in the economy.
Lower interest rates makes saving less attractive and stimulates spending and borrowing. The opposite occurs when interest rates are increased. Lower interest rates can boost the prices of assets such as shares and houses.