Finance & Business World

South African exporters should not rely on a weaker rand to remain globally competitive, a senior central bank official said.

“It is sometimes argued by some commentators that a weaker exchange rate is in the long-term interest of the export sector,'' Brian Kahn, a member of the bank's monetary policy committee, said in a speech in Stellenbosch, near Cape Town, today. “We believe this is a fallacy. No person can build a long-term business strategy on a one-way bet on the exchange rate.''

A panel of economists at Harvard University, appointed by South Africa's government to help advise it on how to boost economic growth, has recommended that the government intervene to weaken the rand to keep exports competitive. The rand has gained 54 percent against the dollar since the beginning of 2002.

“The South African Reserve Bank does not intervene to manage the exchange rate,'' Kahn said. “We would of course prefer to see a stable and competitive currency, but the best we can do is contribute to this through prudent monetary policy, which focuses on and achieving low inflation.''

The central bank has raised its benchmark leading rate five times in less than a year to contain inflation, which has exceeded its maximum 6 percent target since April last year payday loans. The bank will decide whether to raise interest rates again on June 12.

While food and gasoline costs have been the biggest contributor to rising prices, inflation pressures are now more “generalized,'' Kahn said, making it more difficult to bring inflation back into the target range.

Specter of Stagflation

“According to our most recent forecast, inflation is expected to persist above the inflation target of 3 percent to 6 percent and is not expected to return to within the target before the end of 2009,'' Kahn said. “We see the risk to this forecast to be significantly on the upside.''

The central bank will have to adjust interest rates to curb inflation expectations, Kahn said.

“If we do nothing about it, inflation will accelerate,'' Kahn said. “Inflation expectations will become entrenched. It is a very difficult situation we are in.''

Kahn also rejected suggestions that the 6 percent upper limit of the target should be raised, as this would “entrench'' inflation expectations at the higher level.

He added that the “specter of stagflation is a real one'' in South Africa.

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