Inflation deadlines stifle Reserve Bank

Posted On Wednesday, 25 June 2003 02:00 Published by
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- Deadline-driven inflation targeting had become a straitjacket that had forced the central bank to be "very conservative" about monetary policy

Cape Town - Deadline-driven inflation targeting had become a "straitjacket" that had forced the central bank to be "very conservative" about monetary policy, especially interest rate levels, Reserve Bank governor Tito Mboweni said yesterday.

Mboweni told parliament he expected inflation to hit about 4.5 percent over the next year, while the rand could remain steady before appreciating by another 5 percent against the US dollar.

Briefing the two finance committees on his latest quarterly review, Mboweni said that, barring any unforeseen shocks, he expected inflation to moderate to "somewhere around the midpoint" of the 3 percent to 6 percent target next year, while the exchange rate would "remain where it is and maybe recover by another 5 percent against the US dollar".

He hoped administered prices, a major cause of inflation as parastatals and others upped tariffs by more than the target range, would "also behave accordingly".

But he was "tired of talking about administered prices ... nobody listens and it is a waste of time".

If things turned out badly, however, there was a risk of inflation being "slightly above" 6 percent next year.

Mboweni agreed the bank had been "obsessive" about trying to meet the inflation targets set by the treasury. This had come at the expense of possibly lowering interest rates sooner than this month, but he said this reflected his desire "not to be part of a failing exercise".

His job had been made more difficult by the strict target deadlines set by the treasury and flexible exchange rates over which he had no control, even though they had a major effect on inflation.

He would have preferred to have been told to get inflation below 6 percent and "keep it there", with no time frames involved.

He also said he would always prefer a stronger rand, which would keep the imported content of inflation down  
. "You can't afford to have a weak rand from an inflation point of view ... [even though this] contradicts all kinds of other objectives."

He acknowledged that the recent strengthening of the rand had left many exporters "in a lousy corner". Some mining houses had complained to him that they had projected that the rand would depreciate.

They had planned their rand earnings accordingly and, as a result, investments in expansion programmes worth billions of rands were now under threat.

"This notion that the rand is just a one-way bet is wrong," Mboweni said.

"The biggest speculators in the currency market are exporters and importers. The exporters decide to hold on to their dollar earnings for much longer than they are supposed to by law ... hoping that the exchange rate will weaken more and that by the time they bring their dollar earnings they will get more rands ... That's speculation."

Importers would only come into the market when they thought they could pay less for dollar purchases.

These leads and lags had been exacerbated by funds that had tried to manipulate the market.

On recent allegations by economists that the poor were falling into an unmanageable debt trap, Mboweni denied that this was due mainly to higher interest rates. Many other factors were involved, but he remained concerned that too many South Africans were taking on more debt.

He said it would be "a pointless exercise" for the bank to try to estimate how much more South Africans had been paying on their bonds or overdrafts because of the delay in bringing down interest rates caused by incorrect inflation figures produced by Statistics SA.

Publisher: Business Report
Source: Business Report

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