Mboweni reaffirms South Africa centralbank's
commitment to inflation targeting and transparency

TITO Mboweni, the new Reserve Bank governor, has reaffirmed the Bank's commitment to inflation targeting as part of intensified efforts to improve transparency in monetary policy. According to the South Africa Business Day reporter Samantha Enslin, Mboweni, addressing his first annual general meeting of the Bank on August 24.

Although reaffirming the Bank's commitment to inflation targeting, Mboweni said implementation rested on careful preparations, consultation and policy co-ordination.

He also announced the introduction of an internal monetary policy committee, which would formulate monetary policy, and a monetary policy forum to provide an opportunity for labour, business and other organisations to be consulted on monetary policy twice a year.

The Bank also plans to discuss with government the relaxation of exchange controls when underlying conditions are conducive to such a step. Mboweni said this should contribute to the dismantling of the oversold forward book and the reducing of the net open foreign currency position.

The forward book is the difference between the country's forward dollar assets and liabilities. The net open foreign currency position is the Bank's uncovered exposure in the foreign exchange market.

Inflation targets are generally set by a government and implemented by the central bank. Mboweni said the Bank's view was that an agreement on targets should be signed by the finance minister and the Bank governor to define precisely the co-ordinated effort needed to contain inflation in pursuit of sustainable high growth and job creation.

"In an open and democratic country I do not think you impose an inflation target on a central bank," he said. "With the adoption of inflation targeting it will become clear that the containment of inflation is not solely the Reserve Bank's responsibility…. Inflation targeting will be more effective when economic policies are well co-ordinated."

Finance Minister Trevor Manuel said previously inflation targeting would be implemented in the first quarter of next year, but Mboweni would not commit to a deadline.The Bank's current inflation target is 1%-5%. Mboweni said inflation targeting was a complicated monetary framework requiring careful implementation. This includes refocusing the Bank's economics department on research and developing technical support systems such as additional and more sophisticated inflation forecasting models.

The Bank would also design and implement a survey-based assessment of inflation expectations.

Ernie van der Merwe, chief economist and head of research at the Bank, said a completely new inflation index might be used for inflation targeting as the core inflation and headline inflation rates both present distortions. However, this would need to be discussed further with Statistics South Africa.Mboweni said the Bank would approach a number of central banks which have implemented inflation targeting for help.

The Business Day reports that labor and business organisations supported the more consultative approach of the new governor. Economists said although decision-making powers on monetary policy would continue to reside with the governor and his deputies, the monetary policy committee would allay concerns that monetary policy was a one-man show. JP Morgan SA economist Peter Worthington said the committee should help address market fears of Mboweni behaving in a populist fashion.

Michael Hume, an international economist for US investment bank Lehman Brothers in London, said "a monetary policy committee - akin to that used at the Bank of England - should lessen the chance of policy mistakes by drawing on a wider range of experience. It should also deflect market criticism about Mboweni's lack of central banking experience." Criticism centred on the fact that minutes of the monetary policy committee were unlikely to be published, which Worthington said would be a lost opportunity for greater transparency. Economists said Mboweni presented a consistent policy approach in a conservative style.

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