Low inflation is good for growth and employment, South African Reserve Bank Governor Tito Mboweni told French businessmen and corporate treasurers on Monday.
“When we introduced inflation targeting, there were loud voices that said that the inflation target was too low and this would stifle growth. I am pleased to say that the gospel that we have preached — namely that low inflation is good for growth and employment creation — has in fact come true.
“The rich can hedge against inflation but the poor cannot — so, low inflation also benefits the poor.
“South Africa is well poised for better performance ahead. There is no property bubble in my personal opinion, but there are danger signs. It is better to pay off debt, than to borrow to fund current expenditure.
“Exporters have come to me and complained about the strong rand, but I have no divine powers to keep the exchange rate weak. The danger is that if you intervene, in a gung-ho fashion, that you do not know where it will lead.”
Exporters were noticeably absent in 2002 during the rand’s commission enquiry.
“The only target that we have is inflation. We do not have a secondary target such as money supply or the exchange rate or food prices. The exchange rate is taken into account when we formulate our monetary policies, but we are price takers and use the exchange rate as determined by the markets,” Mboweni said.
In response to a question from the audience as to why new car prices have not declined given the strength in the rand, Mboweni said that the general population should put moral pressure on suppliers who have so far not adjusted their prices to reflect the strong rand.
He said there are numerous examples such as in consumer electronics where suppliers have in fact cut prices. In general, he said that the weak dollar will be a challenge for other economies when asked about what inflation measures to use when negotiating salaries — in other words, either headline consumer inflation or the Reserve Bank’s inflation target measure, CPIX, which excludes mortgage rates.
Mboweni said that negotiators should always use a measure that is most favourable for their negotiating position.
He said the markets should focus on the key outcome, which is unit labour costs — a combination of the nominal wage increase and productivity gained.
He is very pleased about the decline in inflation expectations as this tends to be a self-fulfilling prophecy.
He concluded with the remark that the decline in inflation expectations reflects the general public’s view that the central bank is serious about keeping inflation low. — I-Net Bridge