Clarity in macroeconomic management underpins stable financial and currency markets and creates an environment conducive to stable economic growth. After the blow-out in 2001 — having stopped just short of hitting R14 to the United States dollar — the rand began on a steady path to recoup its value. From the beginning of 2003 to the middle of last year, it traded within a relatively stable band against the major developed market currencies.
Macroeconomic policy was clear: the national treasury managed a prudent and conservative budget and the Reserve Bank took on the fight against double-digit inflation.
The Reserve Bank was helped by the international vote of confidence in our macroeconomic management that a strong rand represents, and enjoyed the disinflationary impact the strengthening currency had on the underlying price level. In 2003, consumer inflation moved into the 3% to 6% target zone and has been there since. In May last year, however, uncertainty about US interest rates caused panic in global markets, the rand weakened 15% against the US dollar and has struggled to recover.
All other currencies in the commodity-producer block, or the most-traded-currencies block, strengthened significantly against the US dollar. The anomalous rand weakness and volatility reflect an uncertainty in financial markets about macroeconomic policy. Questions about the level of the rand in Asgisa (the government’s economic policy) are not supportive of currency stability.
A weak rand is inflationary and expensive and, given the Reserve Bank’s inflation target policy, it could lead to a painful macroeconomic adjustment. Asgisa has ambitious infrastructure development plans for which we have no choice but to import machinery — a weak rand makes this more expensive.
In order to weaken the rand, the Reserve Bank has to sell rands and buy US dollars and — to prevent an inflationary impact — it has to sell bonds to mop up the liquidity, at an expense to the taxpayer of R80-million per R1-billion it sells into the market.
The rand experienced further pressure from uncertainty in the Reserve Bank’s approach to monetary policy.
Throughout this period of rising interest rates, food and fuel have been the main contributors to underlying inflationary pressures — not consumer demand. Producer price inflation reached double digits while consumer inflation remained at around 5%. Producers will always pass on price increases to consumers if consumer demand is high and rising, but this time they could not. When inflationary pressures come from supply-side shocks such as high food prices from adverse weather conditions or high fuel prices from geo-political tensions, raising interests can have no effect. Rising interest rates are only effective when price pressure come from consumer demand, which in this cycle they did not.
For financial market and currency stability, it is critical that these macroeconomic policies be clarified and focused on achieving long-term and sustainable economic growth.