By Nevin, Tom
African Business , No. 310
The pressure on the governor of the South African Reserve Bank to shift his attention from inflation targeting and further unshackle the national currency had been intense over the past five months. The fact that he finally buckled came as welcome, if somewhat short-lived, relief to South African industry, mining houses and countries in the region whose currencies are linked to the rand.
Reserve Bank governor Tito Mbweni's decision to cut 0.5% off the earlier repo rate of 7.5% came as a welcome bolt from the blue for most of the country's business sector that had convinced itself that high oil prices and jittery inflation figures would have persuaded the Bank to leave rates as they had been.
The cut brought a smile to trade union movements who welcomed it as a sign that the Reserve Bank had finally heeded its calls for a weaker rand.
Roger Baxter, senior economist at the Chamber of Mines, sees the cut as an essential move for saving the mining industry and intimated more is necessary. "Our currency is too strong," he insists. "It does not represent the true fundamentals of our economy in that it does not consider both importers and exporters."
Efficient Group economist Nico Kelder considers the decision to cut the interest rate "brave", adding that surprise cuts signify that "sometimes Governor Tito Mboweni's crystal ball is in better condition than ours".
Whether or not Mboweni's crystal ball had anything to do with the rate cut, we'll probably never know. The real question is: Was he pushed, or did he jump? Did pressure from South Africa's labour unions, the communist party and the World Bank persuade the Reserve Bank governor to unlock the cage and let the rand fly free? When he was asked if the cut was the first signal of a policy shift on the rand exchange rate (in search of a 'more competitive' rate that would accelerate economic growth and encourage job creation) Mboweni insisted that policy had never focused on inflation targeting for its own sake.
It was always about improving the overall performance of the economy. However, he added, when the Bank perceived a slackening of economic activity, it could not pretend to live in a different world.
Until now, when policy seems to be on the brink of being rewritten, the government has focused almost exclusively on holding the inflation rate within a targeted range of 3% to 6% and achieved this by keeping interest rates higher than its major global trading partners.
This had the effect of flooding the bond and equity markets with 'hot' overnight foreign money that in turn buoyed the rand to levels that ravaged the economy; but made it financially agreeable for the central bank to stock its vaults with billions of cheaply bought US dollars.
Unions and communists take a bow
The left wing of the government, the trade unions and the communists, are taking most of the credit for the governments inflation targeting U-turn.
At a summit of South Africa's ruling tripartite alliance, the African National Congress, SA Communist Party and the Congress of South African Trade Unions (Cosatu) papered over the cracks in the governing body but Cosatu in particular warned that the grouping would fall apart unless the government did something to promote a more competitive rand.
While this is in conflict with government policy of low inflation targetting, it is a price the ANC is going to have to pay to keep its increasingly restive minority partners in the fold.
Cosatu, whose members, mainly in mining and manufacturing, have been losing their jobs by the thousands each month, has been the most vociferous. …