Politics and policies: Determinants of South Africa's monetary policy problems in the 1980s

ABSTRACT

The interim and final reports of the De Kock Commission (Republic of South Africa 1985) brought monetary policy in South Africa closer to the international consensus of the 1980s, where explicit nominal anchors supporting a policy commitment were widely shared principles. A nominal anchor for monetary policy was introduced for the first time in South Africa in 1986. Despite the adoption of a nominal achor, the 1980s were characterized by sustained high inflation and financial instability. This paper assesses the role of politics and policies in the period running up to and following the announcement of a nominal monetary policy anchor for South Africa. It is shown that all politics and policies contributed to financial instability and to sustained inflation in the 1980s.

Keywords:

• lender-of-last-resort
• monetary policy
• Primrose Prime
• SA Reserve Bank

Notes

2 Dr DW Goedhuys served as an Advisor to the Governor of the SA Reserve Bank in the 1980s.

3 Dr RM Gidlow served as an Advisor to the Governor of the SA Reserve Bank in the 1980s.

4 Goedhuys (1994, 155) cites the wrong date for the by-election: February 1983 is cited, rather than November 1984, but the relevance nevertheless remains the same, namely that the central bank dropped interest rates shortly before a crucial election for the ruling party, and raised rates shortly after the election.

5 On 2 November 1984 these rates were at 22.20 and 21.78%, respectively.

6 Mr PW Botha was State President at the time.

7 With a much better current understanding of de jure and de facto central bank independence, the notion of a head of state granting or refusing permission to a central bank for an interest rate increase is a strange one.

8 With the benefit of hindsight and a better understanding of central bank autonomy and independence, it is interesting to note that the setting of the level of interest rates was discussed at a Cabinet meeting, let alone resulting in a clash between the State President and the Minister of Finance.