October 29, 2004

By Renée Bonorchis

Johannesburg - Brian Kahn, senior deputy head of research at the SA Reserve Bank and a member of the monetary policy committee (MPC), said yesterday that this week's consumer price inflation numbers, at an unchanged 3.7 percent a year, represented South Africa's 13th consecutive month of falling within the inflation target of between 3 percent and 6 percent.

This had allowed the MPC to drop interest rates a total of 6 percentage points in two years.

Kahn said that if the MPC was to forecast that inflation would fall well within the target, the MPC could theoretically loosen monetary policy.

"But models aren't perfect," he said. "We can't rely mechanically on forecasts. We have to also use judgment." Judgment would be swayed by items like the high and rising price of oil.

He said that in June's MPC meeting the bank's models had suggested that inflation would break out of the upper side of the target, but by August the picture had changed dramatically because the effects of the high oil price had been mitigated by the strong rand.

"We felt there was room for a modest reduction," he said. "But in October the forecasts had inflation a little bit closer to the top of the range, so we felt we could not drop rates."
He said administered prices were dropping and they represented almost 17 percent of the prices set in South Africa, yet they were prices that monetary policy could not influence.

Kahn was also sympathetic about the fact that the stronger rand had given some companies, especially resource companies, a hard time of it, but said the bank could not have a dual target.

"We have bought over $36 billion in reserves in total, but we have limited resources to weaken the exchange rate, even if we wanted to," he said.