Wednesday, November 09, 2005

South Africa foreign exchange controls should be lifted

By Gordon Bell
Reuters South Africa
November 9, 2005

South Africa’s central bank governor, Tito Mboweni, urged the country’s Treasury to abolish what he calls “purposeless” foreign exchange controls during a recent address to a conference in Cape Town. He added, “[t]he cost of exchange control administration and the inconvenience that goes with managing (them) might not be worth the exercise."

In response to Mboweni’s comments, the rand weakened by nearly 3 cents to 6.76 against the dollar. In the country's mid-term budget unveiled two weeks ago, Finance Minister Trevor Manuel announced a further easing of investment limits for the country's banks and fund managers, but many controls remain, including for individuals.

Analysts and traders speculated that the governor's comments implied further relaxation of foreign exchange controls in South Africa's 2006 budget and that the long-term result for the currency should be positive, despite the immediate weakening of the rand.

As far as interest rates go, Mboweni also said he was against the idea of "artificially low" rates and an inflation target which was too flexible, although these steps have been urged by some to boost growth and reduce high unemployment in the continent's biggest economy. The country's targeted inflation rate has remained inside its three to six percent target for 25 consecutive months, although higher oil prices have pushed it up to 4.7 percent from a record low of 3.1 percent early this year.

South Africa's rand regained its poise on Wednesday after wobbling in response to calls from central bank governor Tito Mboweni to abolish exchange controls, taking heart from a modest recovery in the euro.

For the full speech, see http://www.reservebank.co.za

Mboweni has cautioned that the long period of lower interest rates may come to an end, and an interest rate hike may be coming for December. South Africa’s Reserve Bank must continue to closely monitor events and take necessary action to achieve the inflation target mandate, and adjusting interest rates mitigates inflationary pressures. Is it better to raise interest rates preemptively than to hike rates more steeply later on?

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