/ 7 August 2009

Mboweni says SARB should ignore pressure

South Africa’s central bank should pursue its objectives of maintaining price stability regardless of political pressure, Governor Tito Mboweni said on Thursday.

Mboweni has drawn criticism from labour unions demanding hefty interest rate cuts in an effort to protect the country’s poor as South Africa grapples with its first economic recession in 17 years.

The central bank has already cut interest rates by 450 basis points since December after hiking them 500 basis points in the two years to June 2008 to fight inflation, but kept the key repo rate unchanged at 7,5% in June, amid inflation worries.

”The central bank has to be managed by people who don’t have elections in mind. We must do so based on technical analysis and not what’s in the interest of the unions,” Mboweni said ”Our responsibility is to the people as a whole. You must stand your ground and be prepared not to have very many friends around.”

”If the government decided on [monetary policy] framework and interest rate policy, there would be a problem it would be easily manipulated … You want to avoid politicisation of rates,” he added.

He also reiterated that the aim of South Africa’s central bank is to keep inflation low, noting interest rates are the major instrument to protect the buying power of the domestic currency.

”We have to protect the buying power of the currency and maintain price stability so we have to keep inflation at low levels because the lower the inflation rate the stronger the ability to buy,” Mboweni said in a speech at the University of Johannesburg’s Soweto campus.

”The major instrument in the process of protecting buying power of the currency in the hands of people is monetary policy, interest rates. The most unpopular policy is when interest rates are going up.”

Mboweni also pre-empted a question about where rates would go next week, saying: ”I don’t know.”

Consumer inflation has been above the central bank’s target of between 3% and 6% for more than two years. Headline CPI slowed to 6,9% year-on-year in June.

Mboweni, who turned down the government’s offer of another five-year term and will leave his post as governor in November, baulked at suggestions to relax inflation targeting.

”Anybody who says a little bit of inflation is good is living in cuckoo land,” he said.

Mboweni said he hoped inflation would be in the target band when he leaves the bank in November.

Despite criticism from unions, the government has repeatedly said it was pleased with the way Mboweni handled monetary policy and supported him fully.

On Zimbabwe, Mboweni said he had not been formally approached about the neighbouring country adopting the rand as its legal tender.

But he said the Zimbabwe’s central bank had an overdraft facility with the South African Reserve Bank and had never defaulted on it. – Reuters