Mister Speaker, monetary and exchange rate considerations are also important elements both in adapting to global developments and in creating an environment supportive of growth and employment creation.
Let us remind ourselves about what Section 224 (1) of the Constitution says about the mandate of the Reserve Bank:
The primary objective of the South African Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic.
As required by the Constitution, the Bank should pursue its mandate independently and without fear, favour or prejudice. The Governor and I will consult regularly to ensure that South Africa is prepared to respond with agility and flexibility to changing economic circumstances.
The global financial crisis has illustrated the need for central banks to take a broader view of the economy in managing inflation; including growth, employment trends, asset prices, financial sector stability and competitiveness of the exchange rate. Our inflation targeting framework incorporates such flexibility and allows inflation to deviate from the target in event of shocks. In such cases, the Bank is required to explain clearly to the public the time frame over which inflation will be adjusted back to within the target range without unnecessary instability in output and interest rates.
A credible monetary policy framework that focuses on managing inflation is crucial to reducing long term borrowing costs and providing confidence about the future. These are necessary to stimulate investment, employment and competitiveness – particularly among exporters and import-competing industries. At present our level of inflation is higher than that of our trading partners, which lowers our competitiveness. Low and stable inflation is also essential to protect the living standards of workers and the poor.
Mister Speaker, I wish to confirm that the Reserve Bank will continue to pursue a target for CPI inflation of 3 to 6 per cent. Governor Marcus and I have agreed that monetary policy should be conducted in a consistent and transparent manner within a flexible inflation targeting framework. The role of the Bank in maintaining financial stability will also be enhanced.
Improved communication with the public about the role of monetary policy in supporting growth will increase the effectiveness of the Bank in achieving its mandate. The Governor and I agree that ongoing assessment, discussion and commentary about our monetary policy by analysts, interested members of the public, interest groups, and the broader research community, is constructive for the emergence of a social consensus in this area over the longer-term.
Mr Speaker, we are agreed that we need a stable and competitive real exchange rate, though in today’s world this cannot be translated into a straightforward fixed price of the rand. Government is concerned that at certain times, rapid capital inflows that may be required to sustain investment spending have the unintended consequence of appreciating the currency. We have therefore agreed with the Reserve Bank that we will continue to take steps to counter the volatility of the exchange rate and to lean against the wind during periods of rapid capital inflows, including reserve accumulation and further exchange control reform.
Long term efforts to support the competitiveness of the real exchange rate include lower wage-inflation, lower budget deficits, larger reserves and a more flexible and dynamic economy. Unfortunately, there is no silver bullet in the pursuit of greater competitiveness. Macroeconomic policy, industrial policy, trade, labour market and logistics infrastructure all contribute to creating a more productive economy.
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