Tito Mboweni, Governor, South African Reserve Bank

South Africa’s economy is accelerating and confidence is booming. In the third quarter, output was up 5.6%, the fastest pace of expansion in eight years. Since 2003, the Reserve Bank – the central bank – has cut interest rates on its key overnight rate to banks by 600 basis points (bp) to 7.5%, stimulating vigorous retail sales and a surge in property prices.

Reserve Bank governor Tito Mboweni’s success has been to read the inflation signals correctly, announcing monetary policy changes that have so far proved spot on despite the one to two-year transmission lag between adjusting interest rates and the impact of the adjustment on the real economy. A surprise 50bp cut in August has won favour with the markets as inflation forecasts remain benign.

South Africa is targeting inflation, aiming to hold price increases to within 3%-6%. Despite a 37% collapse in the value of its domestic currency, the rand in 2001 – which caused inflation to spike at 11.3% in 2002 – Mr Mboweni remained resolutely committed to put a brake on price rises, hiking interest rates 400bp. The economy took a hit, with growth slowing sharply. However, the wider interest rate differential between South Africa and developed markets attracted portfolio capital, a trend that was enhanced as global commodity demand rose, strengthening commodity currencies such as the rand. The stronger rand has hurt exports – 40% of exporting manufacturers say it is no longer profitable to export goods – but it has also insulated the economy against the inflationary impact of higher oil prices.

The Reserve Bank is adamant that it does not and will not influence the level of the currency, a hard lesson that it learnt in 1998 when an attempt to defend the currency incurred a massive forward dollar liability, which was only closed out in 2005, and had exerted downward pressure on the rand in the intervening period. However, the bank argues that the strengthening currency has had an “involuntary monetary tightening” effect, reducing external demand for exports and consequently being a mitigating factor in favour of monetary relaxation.

The bank has also been actively buying dollars in the open market, on an opportunistic and inconspicuous basis, to boost the country’s meagre foreign reserves – a vulnerability that is frequently noted by ratings agencies. In November (the latest period for which data is available) dollar-equivalent reserves rose 14% to about four months’ worth of imports.

Although dollar purchases should theoretically weaken the rand, traders were more taken with the better structural underpinnings of the currency – namely more reserves – pushing the rand into a stronger territory.

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