Mboweni is prepared to intervene on rand

THE South African Reserve Bank has signalled a change of mind about intervening in the currency market, with governor Tito Mboweni saying at the weekend that the central bank would ‘lean against the wind’ when the circumstances required it.

Mboweni, however, did not indicate that a target range for the currency, similar to the three to six per cent inflation target, would be adopted.
During a discussion at a monetary policy strategic planning session at Magoebaskloof, the governor said that, when he moved from labour minister to the central bank 13 years ago, he had opposed any intervention in the currency market.
He had asked himself at the time how one knew ‘what is actually moving the exchange rate’ at any one point. ‘How would your actions in today’s spot market have particular results in the medium and long term?’ he asked. ‘I was of the view of non-intervention in the currency market.’
Mboweni said he had ‘somewhat changed my mind over the years’ on intervening in the currency market.
The governor has been criticised by the labour movement over what it considers too-high interest rates. Trade union federation Cosatu last week called for President Jacob Zuma’s government not to reappoint Mboweni when his term comes to an end in August.
Taking up the description of ‘leaning against the wind’ raised by the bank’s financial analysis and public finance research department head, Johan van den Heever, he said the question was how one intervened when the currency ‘overshoots or undershoots’.
‘Do you go around throwing dollars at the market? Do you go around throwing rands at the market … the consequences of which you have to mop up?’
He said the cost of ‘sterilising’ the market could be gauged by looking at the Reserve Bank’s financial statements. ‘See the size of the debentures which we issue into the market. It is not a costless exercise. Central banks must do this,’ Mboweni added.
Van den Heever earlier said it was not a matter of throwing large sums of money into the market but it ‘should retain the option of intervention in the forex market’. He said interventions should be ‘essentially aimed at moderating episodes of extreme exchange rate overshooting and the resultant misallocation of resources’.
-Business Report