/ 20 January 2011

Govt attempt to curb rand bears little fruit

Government’s attempts to curb the rapid strength of the rand were becoming increasingly costly and having little effect on the currency.

Announcing on Thursday that interest rates would remain unchanged, Reserve Bank Governor Gill Marcus said in a statement after the monetary policy committee (MPC) meeting: “During 2010 total direct foreign exchange reserve accumulation by the bank and the national treasury amounted to $7,4-billion, or a spend of just over R53-billion.”

“Despite this, the rand continued to appreciate — 12% against the US dollar during 2010 — and remained strong.”

“I am not sure if any countries who have introduced [such] measures have been able to show [significant currency impacts],” Marcus said in Pretoria.

There has been increasing pressure on South African policy-makers to do more to curb the rand’s strength and improve conditions for South Africa’s exporters and manufacturers in the wake of the recession and weak consumer demand.

But the bank remained committed to accumulating foreign exchange reserves “as and when possible”, Marcus said. Even so, “in the absence of general risk aversion, or a tightening of the monetary policy stances in the advanced economies, the rand exchange rate is expected to remain relatively strong”, she pointed out.

Strong rand shields consumers
On the plus side, the rand’s strength has helped shield consumers from rising global commodities particularly food and oil, Marcus observed.

“The domestic petrol price, which has been cushioned to some extent by exchange rate developments, has increased by 66 cents per litre since September 2010, and by 11% over the past year,” she said.

“Since September, the rand exchange rate has offset the petrol price increase by a cumulative 45 cents per litre.”

The threat of a possible rise in inflation was concern to the MPC, given the rise in fuel and food prices globally. These factors played a part in the central bank revision of its inflation forecast upwards this year, which is expected to average 4,6% in 2011 and 5,3% in 2012, she said.

But the risks emanated from external factors and “unless there are significant unexpected changes in the global or domestic outlook” the bank’s monetary policy stance would remain stable, according to Marcus.

As such the bank kept interest rates unchanged on Thursday, with the repo rate sitting steady at 5,5% and the prime rate remaining at 9%.

Consumers recovering
The MPC decision was widely expected following positive inflation data and retail sales figures that came out earlier this week. Marcus pointed to the consumer price index — which measures the prices of a basket of goods — which slowed to 3,5% in the month of December.

Meanwhile retail sales figures for November grew to 7,7% year on year, an encouraging sign that consumers are recovering from the effects of the recession.

But Marcus flagged the continued rise in administered prices — the prices that government has the power to set — as a contributor to inflation.

“The main contributor to the inflation outcome remained housing and utilities, primarily electricity, which contributed 1,5 percentage points to the 3,5% outcome,” she said

“Administered prices excluding petrol increased at a rate of 9,1% both November and December.”