Central banks prefer stability to almost any other quality and many have made either price or financial market stability their official policy.
The South African Reserve Bank (SARB) regards its primary goal in the South African economic system as “the achievement and maintenance of financial stability”.
It was therefore with considerable glee that SARB Governor Tito Mboweni on March 1 called a media briefing to announce that the forward book, a structural legacy from the apartheid era when South Africa could not borrow on international capital markets, had been eliminated on February 18 after being $25,3-billion in September 1998.
“Bye-bye forward book, we will not miss you,” Mboweni said on Monday at the media briefing.
The elimination of the forward book removes a historic source of vulnerability for the rand and will now allow the SARB to build its gross foreign reserves.
This process already started in February 2004 when $293-million was added to currency reserves for the first significant gain since November 1999, when reserves were boosted ahead of the year 2000.
The SARB’s foreign currency reserves are currently $6.76-billion and market speculation is that the SARB will buy between $500-million and $1-billion per month to boost reserves to a level near $20-billion over the next two years.
South African commercial banks at the end of January held $16,3-billion in their own foreign currency reserves as they provide liquidity to the South African foreign exchange market that trades an average daily amount in excess of $10-billion.
The main aim of building reserves is to make the rand less vulnerable to a sudden shift in sentiment towards South Africa as happened in 1996, 1998 and 2000/1.
This more stable rand may be what is coming down the line, as the rand was far less volatile in February 2004 than in January 2004.
In the first 16 days of January, the rand traded between R6,2348 per dollar and R7,5750 per dollar in thin conditions. Once most market participants returned from their Christmas break, so the volatility of the rand eased and the range in February was between R6,5050 and R7,1250. The average for January was R6,95, while for February it was R6,76.
On a trade-weighted basis, the rand traded between a best level of R59,58 on January 6 and a worst level of R50,11 on January 16 with an average of R54,31, while in February the range was from R56,96 (February 27) to R53,36 (February 9) with an average of R55,26.
If one divides the range by the average to use as a measure of volatility, then January’s trade weighted volatility was almost triple February’s at 17,43% versus 6,51%.
The trade-weighted rand over the past five trading days has been deliciously stable with rates of R56,93 on February 25, R56,95 on February 26, R56,96 on February 27, R56,98 on March 1 and R56,98 on March 2.
The SARB indicated a move towards a more stable monetary policy in December 2003, when it decided on December 11 2003 to cut by 50 basis points instead of the expected 100 or 150 basis points. There was not even a single economist that had predicted a 50 basis points cut.
This less-than-expected cut then prompted a revision to economists’ forecasts of continued rate cuts in 2004 and already by the end of December 2003 the consensus was that there would be no more rate cuts in 2004.
This consensus was reinforced when the SARB on February 26 decided to keep rates unchanged for the first time since March 2003.
The next scheduled SARB monetary policy committee meeting is on April 21 and 22, a week after the April 14 national and provincial elections, and the consensus forecast is that there will once again be no change in interest rates. — I-Net Bridge