Price stability remains a core objective, South African Reserve Bank (SARB) governor Tito Mboweni said in a speech at the annual heads of foreign missions dinner hosted by the SARB on Monday evening.
“However, the South African economy will always be affected considerably by developments in the rest of the world. Any weakness in the United States dollar or any of the other major currencies will affect the exchange rate of the rand. Our focus can therefore only be to develop an environment favouring greater stability,” Mboweni said.
“Monetary policy will continue to focus on the objective of price stability. Fortunately, the world economic outlook has recently improved considerably, which should assist in attaining higher domestic economic growth. In addition, the outlook for inflation looks good,” he said.
Mboweni pointed out that fluctuations in the external value of currencies are unavoidable in the current international monetary system of generally floating exchange rates.
Even when currencies are pegged to another currency or to a basket of currencies, they still float against other currencies and fluctuate widely at times.
“Large fluctuations in the exchange rate of the rand are clearly not healthy for the economy. The uncertainty caused by these fluctuations makes investment and export planning extremely difficult. What may seem to be a profitable venture can turn out completely different with a substantial swing in the external value of the rand.
“The Reserve Bank would obviously prefer to have greater exchange-rate stability, but as already indicated fluctuations in the exchange rate of the rand seems unavoidable,” Mboweni said.
He said that the SARB favours exchange-rate stability, which is why the SARB has focused on improving the net open foreign currency position (NOFP), which is the SARB’s forward book, what Mboweni calls the SARB’s dollar overdraft, minus net foreign reserves.
The NOFP has previously been perceived as a source of exchange-rate weakness and instability, so the SARB’s objective was therefore to eliminate this oversold position, which stood at $23,2-billion at the end of September 1998.
This objective was finally achieved in May 2003 and since then the NOFP has swung from an overdraft situation to a surplus situation.
At the end of October a positive NOFP of $2,7-billion was recorded and this has been increased further to an estimated $3,7-billion at the end of November.
“Having removed this perceived vulnerability, the price discovery process in the market for foreign exchange should now display a better two-way trading pattern,” Mboweni said. — I-Net Bridge