UPDATE 3-South African watchdog comments on central bank rattle rand | Reuters

* Rand falls more than 1.5 pct against dollar

* Bonds weaken on proposed central bank changes

* Watchdog says central bank failed over Absa case

* Future of SARB autonomy in question – analysts
(Adds central bank governor comments)

By Dinky Mkhize and Olivia Kumwenda-Mtambo

rand fell more than 1.5 percent on Monday after the
Public Protector, an anti-graft agency, recommended
constitutional changes to make the central bank promote economic
growth rather than currency and price stability.

By 1840 GMT, the rand was trading 1.64 percent weaker to the
dollar at 13.0150, having hit 13.0525 in response to the
comments from Public Protector Busisiwe Mkhwebane.

Government bonds also weakened, with the yield for the
benchmark instrument due in 2026 rising as much as 11
basis points to 8.595 percent.

Mkhwebane made the proposal in a statement to a Pretoria
news conference where she delivered her findings on an
apartheid-era bailout of Barclays Africa Group.

In her recommendations, Mkhwebane said the constitution
should be changed to make promoting balanced and sustainable
economic growth the primary objective of the South African
Reserve Bank (SARB).

The central bank said that it was studying the Public
Protector’s report and would announce its response to the
findings and remedial actions.

But SARB Governor Lesetja Kganyago told a business gathering
late on Monday, without making specific reference to Mkhwebane’s
recommendations, that keeping inflation low and protecting the
value of the currency was supportive of economic growth.

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“The ratings agencies have been clear that the effectiveness
of the central bank is one of the strongest pillars supporting
this economy – a claim that speaks to both our price and
financial stability mandates,” Kganyago said.

“We will continue to honour our constitutional mandate and
the trust placed in us by the South African society.”

Specifically, Mkhwebane said the phrase “to protect the
value of the currency” should be removed from the constitution.
That phrase has been central to South African monetary policy
since the end of white-minority rule in 1994.

Mkhwebane was delivering her findings against Barclays
Africa, and it was unclear why deviated into monetary policy.
Nomura emerging markets economist Peter Attard Montalto said
the tangent was touching “Pandora’s Box”.

“This is quite unusual that a Public Protector has been so
specific on changing the constitution or indeed be so radical on
transformation,” he said.

Nevertheless, he said, any changes to the central bank’s
mandate were unlikely to happen in the short to medium run given
the legal resistance the SARB was likely to mount.

“I see the SARB leadership strongly and resolutely defending
their independence and existing mandate including via court
action if necessary,” he said.

Economists Nic Borain and Jeff Schultz at BNP Paribas South
Africa said in a note that the Public Protector had placed the
future of the central bank’s autonomy into question.

“We also think that it is possible that the public protector
has overstepped her powers in instructing Parliament to change
the constitution and, therefore, her report is likely to face
judicial review,” Borain and Schultz said.

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In her findings against Barclays, which trades under the
name of Absa, Mkhwebane said the bank had unduly benefited from
apartheid-era bailouts and must repay 1.125 billion rand ($87

She also said the government and the Reserve Bank had failed
in their role.

Mkhwebane said her investigation had found that the
apartheid government breached the constitution by supplying
Bankorp, which was acquired by Absa in 1992, with a series of
bailouts from 1985 to 1995.

Absa denied any wrongdoing. It said it was studying
Mkhwebane’s report and would consider its legal

At the same event, Mkhwebane said she will oppose a bid by
President Jacob Zuma to have set aside a report on claims of
influence-peddling by him and his government.

($1 = 12.9900 rand)
(Additional reporting by Johannesburg bureau; Writing by James
Macharia; Editing by Toby Chopra)