Mboweni blows cold on rate cut

Reserve Bank governor Tito Mboweni hinted on Tuesday that the central bank would not try to weaken the rand by cutting interest rates on Thursday, saying that the Bank would not "lose focus" in targeting inflation.

In the face of growing pressure to cut interest rates to weaken the rand, Mboweni said that monetary policy would not be used to target any variable besides CPIX (consumer inflation less mortgages).

"(Our) central bank is not losing focus," he said.

"And indeed it should never lose focus. We are in the business of targeting inflation and not any other intermediate variable."

Mboweni, who was addressing diplomats in Pretoria last night, said he preferred a "competitively priced" exchange rate, and did not favour a weak rand or an overvalued exchange rate.

He said that the rand was expected to strengthen against the dollar in the near term, given the sell-off in the US currency, but he did not foresee a complete collapse of the dollar.

The build-up of foreign exchange reserves was seen as "fundamental to the stability of the foreign exchange market", Mboweni said.

Figures released by the Bank on Tuesday showed the Bank had stepped up its dollar purchases last month to $1,3-billion, boosting gross reserves to $14,4-billion.

However, the rand was hardly dented by the central bank's increased activity in the forex market, with the currency strengthening 5,37% against the dollar, rising to a six-year high of about R5,75 last month.

The Bank has faced growing pressure from exporters and labour unions to buy dollars more aggressively in order to cap the rand's strength.

News of the Bank's increased activity in the forex market failed to knock the rand on Tuesday, with the local currency strengthening briefly to R5,70 (R5,75).

Econometrix Treasury Management analyst George Glynos said this reflected the market's positive sentiment towards the Bank's efforts at boosting reserves, and the general bearish sentiment towards the dollar.

Although the Bank has been steadily building gross reserves since it squared off its dollar debts earlier this year, it still had some way to go in raising reserve levels to internationally acceptable levels, said
Glynos. Using the net reserve figure of 11bn, Glynos said this amounted to only two months of cover for SA's import levels.

Article by: Nasreen Seria - www.netassets.co.za