South Africa’s central bank will use a “flexible” inflation-targeting policy to address any future financial shocks, Deputy Governor Lesetja Kganyago said.
That approach will allow the rand to cushion the impact on the economy from swings in inflows during crises, Kganyago said in a speech yesterday, according to a copy posted on the bank’s website today.
South Africa has kept the benchmark repurchase rate unchanged at 5.5 percent since November 2010, even as inflation accelerated, to help support the economy as Europe heads into a recession. Investors have turned to higher yielding, emerging market securities as Europe and the U.S. pledged to keep rates near record lows, bolstering the rand. The currency has surged 7.6 percent this year after plunging 18 percent in 2011.
“The financial shocks that South Africa will face in future will continue to be best addressed with a flexible inflation targeting framework that allows the currency to cushion the domestic economy from volatility,” Kganyago said.
The rand fell 1 percent to 7.5177 against the dollar as of 4:47 p.m. in Johannesburg today.
To minimize the rand’s impact on inflation, the central bank needs “foward-looking inflation expectations and transparency by monetary authorities,” Kganyago said. While that approach may not always be successful, it’s “far better than the alternative of having to move domestic interest rates on a frequent basis to try to maintain a stable exchange rate,” he said.
A more stable rand will also depend on fiscal policy, Kganyago said. The government needs to allocate more resources on building infrastructure to boost the competitiveness of the economy and shift capital inflows toward foreign direct investment, rather than portfolio flows, he said.
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