Mbeki says interest rates not only tool

JOHANNESBURG – Raising interest rates is not the only tool to control spending, the use of credit and other variables in the economy, President Thabo Mbeki said on Sunday.

“It isn’t necessary always to use what is a blunt instrument, interest rates … you could come at this matter in a more targeted way, to address whatever,” he told SABC television in an interview following Friday’s state of the nation speech.”We have started looking at that question and I am quite sure that later this year we will be able to say something about this.”Analysts are divided on whether the central bank – which acts independently to government – will raise its repo rate again on Thursday following four 50 basis point increases between June and December last year to tame inflationary pressures.Consumer spending, fuelled by record credit growth of more than 25 per cent year-on-year, remains a concern for the bank despite inflation coming in lower than expected over the past few months.”If you, for instance, impacted on capital adequacy in the banks in order to impact on credit extension, that might be a better way of coming at it rather than just responding globally with higher interest rates,” Mbeki said.Reserve Bank Governor Tito Mboweni mooted in December – after raising the repo rate to 9 per cent – changing the reserve requirements for commercial banks to try to slow the “madness” in bank lending.Mbeki added that government and its economic advisers were reviewing macroeconomic policies, particularly the relationship between the exchange rate, interest rates, inflation and the budget deficit.CURRENCY OVERVALUED? Referring to South Africa’s current account shortfall of more than 5 per cent of gross domestic product, Mbeki said a large trade deficit was a consequence of the country’s faster economic growth.Manufacturers could not keep up with the need for capital goods, requiring increasing imports to drive the economy further, he said.South Africa’s economy expanded by 4,7 per cent in the third quarter of 2006, just off the two-decade record of 5,1 per cent of GDP in 2005.Another issue was the competitiveness of the rand currency.”The other part to this story is the competitiveness of what we are producing in terms of the international market.”That is why the matter has been raised repeatedly about, essentially, that the currency is overvalued, which makes South African goods uncompetitive,” he said.”For that reason and partly for reasons of addressing the volatility of the currency ….we must look at the relationship between inflation, the exchange rate and so on.”South Africa’s rand has fluctuated sharply since mid-2006 following several years of relative strength, and stability.It lost up to 20 per cent of its value against the dollar – knocked by news the current account gap had swelled to more than 6 per cent of GDP – before paring losses towards the end of the year.The local currency ended 2006 around 10 per cent down against the dollar and has lost another about 3 per cent this year.Nampa-Reutersyou could come at this matter in a more targeted way, to address whatever,” he told SABC television in an interview following Friday’s state of the nation speech.”We have started looking at that question and I am quite sure that later this year we will be able to say something about this.”Analysts are divided on whether the central bank – which acts independently to government – will raise its repo rate again on Thursday following four 50 basis point increases between June and December last year to tame inflationary pressures.Consumer spending, fuelled by record credit growth of more than 25 per cent year-on-year, remains a concern for the bank despite inflation coming in lower than expected over the past few months.”If you, for instance, impacted on capital adequacy in the banks in order to impact on credit extension, that might be a better way of coming at it rather than just responding globally with higher interest rates,” Mbeki said.Reserve Bank Governor Tito Mboweni mooted in December – after raising the repo rate to 9 per cent – changing the reserve requirements for commercial banks to try to slow the “madness” in bank lending.Mbeki added that government and its economic advisers were reviewing macroeconomic policies, particularly the relationship between the exchange rate, interest rates, inflation and the budget deficit. CURRENCY OVERVALUED? Referring to South Africa’s current account shortfall of more than 5 per cent of gross domestic product, Mbeki said a large trade deficit was a consequence of the country’s faster economic growth.Manufacturers could not keep up with the need for capital goods, requiring increasing imports to drive the economy further, he said.South Africa’s economy expanded by 4,7 per cent in the third quarter of 2006, just off the two-decade record of 5,1 per cent of GDP in 2005.Another issue was the competitiveness of the rand currency.”The other part to this story is the competitiveness of what we are producing in terms of the international market.”That is why the matter has been raised repeatedly about, essentially, that the currency is overvalued, which makes South African goods uncompetitive,” he said.”For that reason and partly for reasons of addressing the volatility of the currency ….we must look at the relationship between inflation, the exchange rate and so on.”South Africa’s rand has fluctuated sharply since mid-2006 following several years of relative strength, and stability.It lost up to 20 per cent of its value against the dollar – knocked by news the current account gap had swelled to more than 6 per cent of GDP – before paring losses towards the end of the year.The local currency ended 2006 around 10 per cent down against the dollar and has lost another about 3 per cent this year.Nampa-Reuters