SA inflation target to stay, no rand pegging

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South Africa’s central bank will continue to target inflation at between 3 and 6 percent although debate on monetary policy is constructive over the longer-term, Finance Minister Pravin Gordhan said today.

In a budget speech to Parliament, Gordhan also said the government was concerned that at certain times rapid capital inflows had the unintended consequence of appreciating the rand currency.

But the need for a stable, competitive exchange rate could not be translated into a fixed rand, he added.

The ruling ANC’s labour union and communist allies want an overhaul of monetary policy, saying the central bank has pursued its inflation targeting mandate blindly at the expense of economic growth.

The bank has not cut interest rates aggressively enough, saddling consumers with high debt costs, the unions say.

Unions have proposed that the 3-6% target for consumer inflation be scrapped or widened, or that the central bank’s mandate to be broadened to take into account economic growth and job creation.
“I wish to confirm that the Reserve Bank will continue to pursue a target for CPI inflation of 3 to 6 percent,” Gordhan said.

He said he had agreed with central bank Governor Gill Marcus that monetary policy should be conducted in a consistent and transparent manner within a flexible framework.
“Ongoing assessment, discussion and commentary about our monetary policy by analysts, interested members of the public, interest groups and the broader research community is constructive for the emergence of a social consensus in this area over the longer-term,” he said.

In apparent reference to calls to nationalise the central bank, Gordhan reiterated that South Africa’s Constitution stipulated the institution should pursue its mandate “independently and without fear, favour or prejudice”.

However, the global financial crisis had shown the need for central banks to take a broader view of the economy in managing inflation, including growth, employment trends, asset prices, financial sector stability and exchange rate competitiveness.
“Our inflation targeting framework incorporates such flexibility and allows inflation to deviate from the target in event of shocks,” Gordhan said.
“In such cases, the Bank is required to explain clearly to the public the timeframe over which inflation will be adjusted back to within the target range without unnecessary instability in output and interest rates.”

The role of the Reserve Bank in maintaining financial stability would also be enhanced, Gordhan said.

He warned that South Africa’s present inflation levels were higher than those of its trading partners, lowering its competitiveness.

The Treasury said expected large electricity tariff increases were likely over the medium term and would keep CPI inflation close to the upper end of the target range.

Gordhan said the Treasury and Reserve Bank would continue to take steps to counter exchange rate volatility and “lean against the wind during periods of rapid capital inflows”, including reserve accumulation and further exchange control reform.

The government last year expressed concern about the rand’s strength, saying it would undermine exports and the economy as a whole. However, it has ruled out fixing the exchange rate.
“We need a stable and competitive real exchange rate, though in today’s world this cannot be translated into a straightforward fixed price of the rand,” Gordhan said.

Gordhan also told a media briefing the government was very clear there was “nothing else that we need to do for now” about the exchange rate, but that it would monitor the situation carefully and exercise its options as it saw fit.

Long-term efforts to support the competitiveness of the real exchange rate included lower wage-inflation, lower budget deficits, larger reserves and a more flexible and dynamic economy.
“Unfortunately, there is no silver bullet in the pursuit of greater competitiveness,” Gordhan said.

Pic: SA Finance Minister -Pravin Gordhan



Source: www.af.reuters.com