South African Reserve Bank (SARB) Governor Tito Mboweni reiterated on Thursday that the SARB prefers to leave the determination of the exchange rate to market forces.
Addressing a Federation of Unions of South Africa conference in Johannesburg, he said the SARB disseminates data on the balance of payments, foreign-exchange reserves and related matters, thereby helping to inform market participants’ decisions.
On rare occasions, the bank might comment on evidence pointing to possible excesses in price formation in the foreign-exchange market.
“The best medicine for the one-way view regarding the direction of the rand’s exchange value, which prevailed from the early 1980s up to 2001, however, was the recovery of the rand over the past four years, which bit deeply into the pockets of rand pessimists,” he added.
Mboweni said the SARB might also build up or reduce its international reserves. In recent years, the emphasis has been on accumulating international reserves, which naturally has had some price consequences but does not signify the adoption of a target level for the exchange rate.
“When abundant amounts of foreign exchange are available in the market (and the rand is comparatively strong), it presents the bank with a good opportunity to buy more foreign exchange from the market, since its holdings of gold and foreign exchange are on the low side.
“On balance, the bank has increased its gross gold and foreign-exchange reserves from $8-billion at the end of 2003 to just below $19-billion at present.”
Mboweni pointed out that the SARB has a target for the inflation rate but not the exchange rate, which is essentially determined by supply and demand in the foreign-exchange market, reflecting the decisions of numerous participants — tourists, investors, importers, exporters and the likes.
“But for various reasons the bank cannot be blind to the exchange rate, and has a clear preference for a relatively stable and competitive level of the exchange value of the rand,” he stated.
The preference for a relatively stable exchange value of the rand originates from the painful adjustment costs that accompany large movements in the exchange rate. Adjustment at the margin is a natural economic phenomenon, but large movements in the exchange rate could render entire sectors uneconomical and others extremely viable within a very short period of time, he noted.
“The preference for a competitive level of the exchange rate reflects the need for sustainability — for exporters to move into foreign markets and to stay there.
“The preference for a relatively stable and competitive exchange value of the rand is seldom perfectly matched by economic outcomes.
“The foreign-exchange market in South Africa is highly liquid (turnover nowadays exceeds $13-billion per day) and powerful forces beyond our control, such as the international prices of commodities, have a considerable bearing on price formation in the foreign-exchange market.
“Practical experience in the central bank with large-scale intervention in the foreign-exchange market has been sobering. Zealous intervention in a liquid market with numerous financially strong participants can be a costly and largely futile exercise,” Mboweni said. — I-Net Bridge