South African Reserve Bank governor Tito Mboweni said on Monday that the bank has to be wary of changing its policy goals in response to changed circumstances.
In response to a question as to what the Reserve Bank’s policy would be in the event of a rapid depreciation in the rand, Mboweni once again emphasised that the overriding objective of the central bank is to achieve its CPIX inflation targets.
“We at the central bank must be very wary of dynamic inconsistency where we change the policy objective in response to changing dynamics. Our focus in response to changing exchange rate dynamics must be on the second-round effects, not the first-round effects.
“If we intervene as the central bank did in the period May to July 1998, economic agents would very quickly pick up the change in policy. This would undermine our credibility and would make the achievement of our policy objective that much more difficult to achieve.
Speaking at the investing abroad conference in Johannesburg, Mboweni would not be drawn on what interest-rate policy would be going forward but he emphasised that South Africa is doing fairly well as it has its fiscal deficit under control and the Reserve Bank is using the current rand-strength period to build its reserves without influencing the actual exchange rate.
“The government has made significant progress in establishing a stable macro-economic environment. The exchange rate continues to be determined by the market and the exchange rate used in our forecasting models is a given.” — I-Net Bridge