Reserve Bank is not intervening in rand rate

SA’s gold and foreign exchange reserves increased 1,8% last month, lifted mainly by higher gold prices, and showing that the Reserve Bank did not step up its buying of foreign currency despite hefty gains in the rand.

The rand’s sustained rally this year has fanned concern about its negative effect on SA’s tentative economic recovery, fuelling calls for the Bank to take steps to weaken the currency.

But Bank data yesterday showed that it was sticking to its stated policy of letting markets determine the level of the rand. Gross gold and foreign currency reserves rose to 40,5bn from 39,8bn, in line with forecasts.

During the month, the rand rallied 6,4% to R7,28/USD , adding heat to a growing debate about its effect on the competitiveness of local exports.

Bank officials have repeatedly said they would continue to build reserves when market conditions allow, without affecting the value of the currency.

However, analysts have speculated in the past that the Bank buys foreign exchange more aggressively when the rand is a bit too strong for comfort.

“In our view, there is little, if any, indication of Reserve Bank activity in the market aimed at influencing the level of the rand or actively trying to bolster reserves,” said Absa Capital macro strategist Ian Marsberg. “We maintain our view that the Bank will continue to focus on its inflation targeting mandate rather than actively trying to manage the currency.”

Strength in the rand — which has appreciated 19% against a trade- weighted basket of currencies so far this year — has benefits as well as drawbacks. One is that it curbs inflation by making imports less expensive, and helps ease the costs of the government’s huge infrastructure spending programme.

The rand’s drop in the past week has highlighted the potential dangers of intervention to keep the currency at a given level.

Since taking office a month ago, the Bank’s governor Gill Marcus has repeatedly said it would not be “appropriate” for it to intervene to influence the level of the rand.

But she and Finance Minister Pravin Gordhan have also voiced concern over its strength, given that SA is just starting to emerge from its first recession in 17 years.

Economic Development Minister Ebrahim Patel is overseeing talks between labour and business on the perceived damage done by rand strength . “There’s a complex trade-off between policy changes … we are identifying the costs and benefits of each one,” he said last week.

The rand has been buoyed by foreign buying of local shares and bonds, which are at a net R66bn so far this year, up from R53,4bn in the year-earlier period.

Source: Business Day