South Africa’s central bank has signalled a shift in its stance on currency intervention, saying it could ”lean against the wind” to counter extreme exchange rate movements, Business Day newspaper said on Monday.
But officials said the bank would avoid setting targets for the currency, the paper added.
Speaking at the Reserve Bank’s strategic planning session over the weekend, Governor Tito Mboweni said his views about intervening in the currency had changed somewhat.
”When I began my career in central banking, I was of the very strong view that there should be absolutely no intervention in currency markets,” Mboweni was quoted in Business Day as saying.
”I have somewhat changed my mind over the years. Leaning against the wind is actually not a bad policy approach.”
Central bank data on Friday showed South Africa’s net reserves rose 3,2% to $34,502-billion in May, confirming the central bank was taking advantage of a firmer rand to buy dollar.
The rand gained more than 6% in May prompting Mboweni to say its gains may be ”unwelcome”, after it touched a near-nine-month high of 7,86 last week.
The rand has since softened and was last trading at 8,09 against the dollar on Monday.
Mboweni said intervening in the currency market was however, not a ”costless exercise”.
”There are times when, intuitively, if I may say so, that there’s been an overshoot [in the rand] but what do you do about it?”
”You are stuck with this problem. Every time you are buying dollars in the market, throwing rands in the market, you must then again mop up the rand. It’s not a costless exercise.”
The central bank’s head of research Johan van den Heever said even in a flexible exchange rate regime, intervention could sometimes be useful to contain short-term price movements and anchor inflation expectations, but should not be used often.
”Intervention should be rare. There should not be an active target,” the paper quoted him as saying. ”We should rather tip the balance in the market, with a limited amount of foreign exchange bought and sold, rather than entering into mega bets.”
Deputy director-general in the Presidency Alan Hirsch was quoted as saying at the planning meeting there was some general support for the idea of leaning against the wind if South Africa could find cost-effective ways to do that.
”We don’t want to go into heavy engineering around key monetary variables, Hirsch said. – Reuters