June 27, 2017 / 3:21 PM / 2 months ago

UPDATE 1-South Africa's central bank files challenge against mandate change proposal

(Adds governor's quotes, details)

JOHANNESBURG, June 27 (Reuters) - South Africa's central bank on Tuesday filed a High Court challenge against a recommendation by the main anti-graft watchdog to change its mandate, saying it would undermine its role in keeping the financial system stable.

The South African Reserve Bank (SARB) focuses on maintaining currency and price stability but Public Protector Busisiwe Mkhwebane, head of the watchdog, recommended last week that it should act in the interests of empowering citizens by promoting growth.

The proposal comes as South Africa's economy has sunk into recession, its credit rating was downgraded and politics is gripped by questions over President Jacob Zuma's stewardship.

Mkhwebane said the current mandate was focused on a "few commercial interests". The bank immediately rejected that, saying Mkhwebane's office had no business in making recommendations about how it is run.

South Africa's central bank has raised interest rates by a cumulative 200 basis points since 2014 to containing rising inflation, hitting consumers who rely on cheap lending to make ends meet.

South Africa's unemployment is at a 14-year high, and key sectors of the economy, such as trade and manufacturing, are struggling as the country reels in recession.

Governor Lesetja Kganyago said in court filings that Mkhwebane's proposal would undermine SARB's role in keeping the financial system stable, hence it must be set aside.

Kganyago said the public protector had no power to instruct parliament to amend the constitution.

"From the moment it (the recommendation) was announced, it has had a serious and detrimental effect on the economy and for as long as it remains in place, it holds the risk of causing further rand depreciation, further ratings downgrades and significant capital outflows," Kganyago said.

"This gross overreach ... must be stopped in its tracks so that certainty and predictability about the Reserve Bank's role in our constitution democracy is affirmed."

Parliament also plans to mount a legal challenge to the proposal.

The row over the central bank's role has also highlighted divisions in the tripartite political alliance of the ruling African National Congress party (ANC), the country's biggest union, Cosatu, and the South African Communist Party (SACP).

Both the ANC and the SACP are opposed to altering the role of the central bank while Cosatu has backed calls for changes.

South Africa's Deputy Finance Minister Sfiso Buthelezi said on Monday Treasury was yet to take a view on the proposal.

Buthelezi, however, said the debate on whether it was necessary to change the central bank's inflation target range of 3 to 6 percent was welcome.

"Perhaps it's a good (inflation targeting) band, but we set this 3 to 6 percent under different economic conditions, is it still relevant now?" Buthelezi said. (Reporting by Olivia Kumwenda-Mtambo; Editing by James Macharia and Alison Williams)

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