Kganyago puts inflation targeting in perspective

Tuesday, March 23, 2010

Pretoria - The rand's volatility remains a concern, but pegging the currency is not the solution says National Treasury Director General Lesetja Kganyago.

Speaking at the Trade, Industrial Policies and Exchange Rate conference on Tuesday, Kganyago said a fixed exchange rate would be hard to implement and carries a range of economic costs.

This follows pressure from labour unions and other political formations for an overhaul of the monetary policy. They saythe central bank has pursued its inflation targeting mandate blindly at the expense of economic growth.

They added that the bank has not cut interest rates aggressively enough, saddling consumers with high debt costs."The domestic inflation rate is as important for the real exchange rate as is the nominal value of the rand.

"The notion that we can let domestic inflation loose and become more competitive is simply wrong," he said

Finance Minister Pravin Gordhan also resisted this pressure in his budget last month, maintaining the inflation goal at 3 to 6 percent, while Reserve Bank Governor Gill Marcus has said it's not the role of the bank to target a specific level of the rand.

Kganyago said the volatility of the currency made it difficult for small and medium sized exporters to invest in production capacity or for importers to plan for the costs of capital goods.

He added that larger firms and those involved in both importing and exporting were less concerned about the exchange rate, pointing to the need for a more targeted intervention in helping firms manage their overall costs of hedging.

To ease volatility, he said government will provide financing to the Reserve Bank to build up foreign currency reserves.

"Strong and weak currencies carry implications for economic growth, for the evolution of job creation and destruction, and the long-run distribution of income," Kganyago said.

He said it was important that the exchange rate not be given too much credit for determining economic outcomes.