Monetary Control and Interest Rates During the Post‐De Kock Commission Period

Abstract

1) THE CURRENT monetary control mechanism in South Africa, which was implemented on the recommendations of the De Kock Commission (RSA, 1985), is one regulating the cost, rather than the availability of funds at the discount window. As some of the changes associated with the new mechanism were introduced during the early 1980s, and seeing that they were fully in line with the findings of the Commission in 1985, it can be argued that the current period in monetary control started with the appointment of Dr De Kock as governor of the Reserve Bank in 1981. These changes, together with the subsequent appearance of the De Kock Commission's report, coincided with several publications*(2) on the theory of monetary control. After 1986, however, this discipline did not receive the same attention*(3). The new market orientated policy, combined with the above cost of funds-approach, attached great importance to the role of Bank Rate as monetary control instrument. This is illustrated by the independent determination of the Bank Rate since 1983, which is in contrast to the system of a penalty margin above market discount rates before this time. The objective of this change was to strengthen the role of the Bank Rate and to make it instrumental in exercising a greater degree of influence over market rates. Being declared market related, Bank Rate from this time has been set at levels which are seen by the Reserve Bank as appropriate in the light of trends in the financial markets, the business cycle, growth in the money supply, gold and foreign exchange reserves, inflation and the exchange rate. Having opted for the above approach in monetary control*(4), the Reserve Bank requires not only effective influence over the levels of market interest rates, but also the ability to create an environment of general stability in the financial markets. The latter refers more specifically to the avoidance of undue short-term fluctuations from the general cyclical course over time, to which all interest rates are subject. This points to a need for empirical work, firstly on the degree of stability achieved in market interest rates, and secondly

The Demand for Money in South Africa: Parameter Stability and Predictive Capacity

“…A managed float for the exchange rate was introduced in 1979, though exchange controls for residents remained. The exchange rate was unified in February 1983 (De Kock Commission 1985, Terence Moll 1992, Nel 1994). Owing to South Africa's increasing political isolation, the experiment failed and the financial rand had to be reintroduced in August 1985.…”

The Release of Nelson Mandela: Effect on the Johannesburg Securities Exchange

“…Empirical studies by Correia and Wormald (1987) and Van Rensburg (1995) have shown the BA to proxy inflation expectations and hence consumer prices, which by definition are a subset of economic events. Further, Nel (1994) observed "… the general course and pattern of the BA rate after 1987 was to a greater degree in harmony with that of the Bank Rate than before this time." As the bank rate is controlled by the Reserve Bank the BA rate could be regarded as a proxy for the official monetary policy of the Reserve Bank.…”

The Economic Architecture of the Two De Kocks

“…The second De Kock period, 1981 to 1989, saw the intensification of the ever-prevalent racial conflict in South Africa and the subsequent unravelling of the Apartheid regime. The monetary regime changes that took place during this period are well known and substantially investigated in South Africa in a number of papers inter alia by Hodge (2001), Gidlow (1995), De Wet (1986), Goedhuys (1994) and Nel (1994). And although ''the picture presented by our economy in the 1980s was one of doom and decline'' (Goedhuys 1994, 146), the changes introduced by Dr Gerhard de Kock changed the philosophy of monetary policy and conduct to such an extent that the current policy is still based on the principles introduced during the 1980s (Rossouw 2005, 293).…”