Gordhan defends SA’s inflation-targeting and flexible exchange-rate regimes

According to Reuters, Finance Minister Pravin Gordhan yesterday defended the South Africa’s inflation-targeting framework in a written statement to parliament. Gordhan said “Our inflation-targeting framework has proved itself in the past as a valuable signal for credible policy”, saying that it provided investors with “confidence in times of crisis” and “flexibility for the Reserve Bank to respond appropriately during a crisis”.

The minister also reiterated the country’s desire to maintain a flexible exchange-rate stance, saying “The flexible exchange rate also acts as a buffer against shocks and helps to reduce the volatility of interest rates”. Alluding to the fiscal debt problems in Europe, Gordhan said that policymakers would remain “committed to managing risks in an uncertain global environment that included fiscal problems in some European countries”, while at the same time remaining “committed to maintaining macroeconomic and financial stability through supportive and responsible fiscal and monetary policy”.


Gordhan’s comments encompass what remains South Africa’s monetary and foreign exchange policy framework, in our view. Governor Marcus’ statements on a number of occasions that inflation is no friend of the poor, as well as the fact that the SARB continues to favour a flexible exchange-rate regime and is not in the business of targeting a specific level of the rand, support this view. Although it has been pointed out on a number of occasions that the SARB remains concerned about the currency’s volatility, we believe that the options open to the central bank remain extremely limited given the depth of SA’s financial market, the high costs of sterilisation and the risk of damaging the its inflation-targeting credentials. Therefore, in much the same manner as that observed in last week’s gold and foreign exchange reserve figures, we expect the SARB to engage in moderate levels of foreign reserve accumulation activity as and when market conditions permit, rather than target a specific level of the currency.