Inflation targeting, growth move in sync - Mboweni

Source: Daily Business News, South Africa

South African Reserve Bank (SARB) governor Tito Mboweni said that the SARB's inflation targeting policy was compatible with growth in his inaugural lecture as Extraordinary Professor at the University of Stellenbosch.

"Low inflation and financial stability support sustainable economic growth, development, equity and employment creation. They are not in opposition to it," Mboweni said.

The decision by the European Central Bank (ECB) to cut interest rates on Thursday after cutting in December 2002 has put the SARB under increasing pressure to cut interest rates.

The last time the SARB cut was in September 2001, yet the rand is now stronger than it was then.

The pressure comes from various sectors of the economy despite Mboweni's repeated warnings that speculation of an imminent interest rate cut is premature.

These warnings were first issued on 16 January, 2003, when the rand was trading at 8.85 rand per dollar, but the rand reached 7.8357 on 5 March, a 24-month best level.

Many economists and two-thirds of fund managers believe that since the warnings were first issued, circumstances have changed significantly for the better in terms of the proactive inflation targeting regime the SARB is supposed to follow.

Mboweni seems to be willing to listen this view, as he was not categorical in saying that speculation of an imminent interest rate cut was premature.

On January 16, 2003 he said: "Until such time as we see inflation moving significantly in the right direction, it is premature to start speculating about any changes in interest rates."

Instead he used mixed metaphors as he mixed cricket terms with athletic terms in saying: "While I have no doubt at all regarding the Reserve Bank's independence and commitment to achieving the inflation target, the lag structure in economic agents' response will be most interesting. May we have a one-day match rather than a marathon!"

That may read too much into his words, but the SARB has been reducing the amount of debentures outstanding over the past few weeks, so enhancing money market liquidity.

In Thailand increased liquidity prompted the commercial banks to cut lending and deposit rates this week before the central bank had moved, but in South Africa, commercial banks generally wait for a signal from the central bank.

The next Monetary Policy Committee meeting of the SARB is on 19 March and 20. Mboweni said in his lecture that monetary policy changes can generally be implemented almost immediately.

Mboweni concluded with this statement: "CPIX inflation is already in deceleration mode, and the Reserve Bank will vigorously ensure that it ends up in the 6% to 3% target range."