South Africa’s central bank hasn’t ruled out taking “reasonable and responsible” action to curb the rand’s gains in a way that’s consistent with its inflation target, Deputy Governor Daniel Mminele said.
Any attempt to control the exchange rate at a particular level though “is not feasible,” given that South Africa has an open economy that’s affected by global financial markets, Mminele said in a speech in Johannesburg today, according to a copy posted on the Reserve Bank’s website.
The rand has surged 29 percent against the dollar since the beginning of 2009, undermining exports and economic growth in a country where one in four people don’t have a job. Labor unions have joined forces with exporters, such as ArcelorMittal South Africa Ltd., Africa’s biggest steelmaker, to lobby the government to do more to weaken the rand.
“Not having or not seeking any particular target for the exchange rate, however, does not imply that reasonable and responsible steps cannot be taken to manage abrupt adjustments,” Mminele said. “Any actions would have to be consistent with the inflation target.”
Governor Gill Marcus has repeatedly said the central bank won’t target a particular level for the rand. Mminele’s comments today suggest that the bank may be more willing to take steps to weaken the rand, according to Peter Attard Montalto, an emerging markets economist at Nomura Plc in London.
Mminele’s comments indicate “he is further relaxing the Reserve Bank’s stance on rand intervention,” Montalto said in a note to clients. “This is still all building toward a policy change.”
The rand was at 7.2719 against the dollar as of 4:40 p.m. in Johannesburg, after trading as high as 7.2378 earlier in the day.
The National Treasury has stepped up its foreign currency deposits with the central bank this year, allowing it to buy dollars, euros and other currencies to build reserves, which reached $43.2 billion in July.
The Reserve Bank is “cognizant that an over-valued exchange rate over an extended period can be very costly to the economy,” Mminele said. “The open nature of our economy makes us more susceptible to all kinds of spillovers from the global economy and financial markets, making any attempts to seek to control the exchange rate at a particular level not feasible.”
The rand’s gains have helped to keep inflation, which reached a four-year low of 4.2 percent in June, inside the bank’s 3 percent to 6 percent target range. That’s allowed the bank to cut its benchmark interest rate seven times to 6.5 percent since December 2008.
The inflation outlook is “generally favorable, although developments around wage settlements and administered-price increases continue to pose upside risks,” Mminele said.
Public-service labor unions, representing 1.3 million teachers, nurses and other state workers, started an indefinite strike today to demand a pay increase of 8.6 percent. The government is offering 7 percent.
Mminele said the South African economy probably grew at a slower pace in the second quarter than the previous three months, when it expanded an annualized 4.6 percent. The bank expects the economy to grow 2.9 percent in 2010, he said.