The buck stops here

SA may this week embark on the most significant monetary policy shift since its implementation of Inflation Targeting in 2001 and the subsequent change in target made in 2003.

Cosatu and other leftist formations have been calling for a change in monetary policy in as far as it affects the competitiveness of the ZAR and SA exports.

The shift in government policy will be construed in some quarters as a concession to the Cosatu-led leftist alliance of the ruling party. But it is more likely to be a concession to the growing realization that the South African currency is extremely volatile.

As a result of the negative impact the volatile and strong Rand is having on the productive side of the economy a political decision was taken by the ruling alliance to look into this problem and to suggest possible remedies.

On Friday the Minister in the Presidency Collins Chabane announced that the treasury will make an announcement in this regard but he declined to elaborate on what course of action the government will take.

Michael Power, a strategist at Investec Asset Management and a great proponent of a competitive devaluation reckons that the Treasury will not go for the ‘Big-Bang’ approach; instead the government will gradualist.

“The government will probably consider putting in some ‘speed-bumps’ to slow the inflow of hot capital into our equity and bond markets”. There are undoubtedly risks to this approach of monetary policy, one is that to a certain extent a weaker Rand is inflationary, in fact the Reserve Bank has in the past often cited the anti-inflationary effects of a strong Rand as a motivator for keeping the repo-rate relatively high,” Power said.

He adds: “In some instances we need inflation…. I would not mind to see the price of certain imports go up.”

Last year the Rand surged 28 percent against the dollar, reversing its 27 percent slump in 2008.

Today the currency was trading at 7.711 per dollar (at 11:31 a.m.) in Johannesburg, down 3.5 percent since the start of the year.

These gyrations are a result of the disproportionate global trade in Rands in the financial markets, and the fact that the Rand is currently the 14th most actively traded currency in the world.

As a result of SA’s relatively higher interest yields global currency traders are incentivized to borrow in Dollars, Yens and other low-yielding currencies and subsequently buy higher-yielding Rand-based assets.

The demand for these assets drives the Rand up making SA’s products artificially expensive on the world markets.

But these gains in the Rand are easily reversed in times of global risk-aversion and this makes the currency even more volatile in times when stability is needed.

With a monetary policy change on the cards Wednesday’s budget speech is shaping up to be one of the most important in our post-apartheid history.