South Africa’s rand currency, which has rebounded from lows in 2006, may be out of kilter given the country’s wide current account deficit and may need rebalancing, central bank Governor Tito Mboweni said on Friday.
He also said at a business breakfast that while forecasts point to inflation remaining within the target range, the bank could not afford to be complacent on monetary policy.
”If the current account goes into a huge deficit and one is continuously noting that the trade balance is out of kilter, then that says something about maybe the exchange rate being out of balance,” Mboweni said in reply to a question.
”All I’m saying, rather cautiously … is that maybe it [the rand] is out of kilter, maybe it needs some rebalancing.”
South Africa’s current account plunged deep into deficit in 2006, hitting a near-three-decade record of 7,8% of gross domestic product in the fourth quarter.
The rand slumped to a then three-and-a-quarter year low of 7,98 in October last year but has since recovered to around seven to the dollar, albeit amid volatility.
The rand was last at 7,0135, nearly 1% on the day, having slipped from around 6,97 to the dollar on Mboweni’s comments.
Mboweni said there was a perception that given the deficit on the account deficit, the rand may be strong.
”I am hopeful that the rand would increasingly reflect the fundamentals of the macroeconomic environment … the rand level should be a reflection of the macroeconomic fundamentals.”
He added that the central bank had to remain vigilant on monetary policy, with higher fuel costs ”playing an important role” in the less favourable inflation outlook.
The Reserve Bank has warned that the outlook for inflation has deteriorated in line with the higher international oil price, although the targeted CPIX gauge — consumer prices less mortgage costs — was still forecast to peak within the three to six percent band, at 5,9%.
”Persistently high and rising oil prices could cause higher inflationary expectations to become entrenched, thus increasing the probability of a further tightening of monetary policy,” Mboweni said in a prepared speech.
”While recent surveys indicate that inflation expectations remain relatively well anchored at levels consistent with the inflation target band in South Africa, we cannot afford to become complacent, vigilance is required of a central bank at all times.”
South Africa’s petrol price has risen by more than 20% since March.
The Reserve Bank raised interest rates by two percentage points between June and December last year to tame rising inflationary pressures and high consumer spending. It left the repo rate unchanged at 9 percent in February and April. – Reuters