Govt won't fix Rand, end inflation targeting

Wednesday, February 17, 2010

Cape Town - Inflation targeting would continue and there were no plans to fix the rand, the Finance Minister announced on Wednesday.

Pravin Gordhan said the Reserve Bank would continue to pursue a target for Consumer Price Index (CPI) inflation of 3 to 6 percent.

"(South African Reserve Bank) Governor (Gill) Marcus and I have agreed that monetary policy should be conducted in a consistent and transparent manner within a flexible inflation targeting framework," said Gordhan, adding that the Reserve Bank would take a more central role in ensuring financial stability.

The interest rate is currently at 7 percent, while CPI inflation declined from a peak of 13.6 percent in August 2008 to 6.3 percent in December last year, as petrol prices fell and food prices moderated.

While a low inflation rate can help guard the living standards of the poor, the government argues that a lower and stable rate of inflation reduces the long-term cost of borrowing and provides confidence about the future.

This in turn stimulates investment, employment and competitiveness, particularly among exporters and those industries relying on imports.

Gordhan said that he and Marcus had agreed that an ongoing assessment, discussion and commentary about the Reserve Bank's monetary policy by analysts and those in the public, was constructive for the emergence of "social consensus" in this area in the long run.

Turning to the Rand, Gordhan said: "Mr Speaker, we are agreed that 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".

He said the government was concerned that rapid capital inflows that may be required to sustain investment spending have the unintended consequence of appreciating the currency.

"We have therefore agreed with the Reserve Bank that we will continue to take steps to counter the volatility of the exchange rate and to lean against the wind during periods of rapid capital inflows, including reserve accumulation and further exchange control reform."

He pointed out that long-term measures to make the Rand more competitive included ensuring a lower wage inflation, running lower budget deficits, building larger reserves and developing a "more flexible and dynamic economy".