JOHANNESBURG, March 2 (Reuters) – South Africa needs
to set policies that aim to reduce the volatility of the rand
exchange rate as capital flows pose challenges to emerging
market currencies, central bank Deputy Governor Lesetja Kganyago
said in a speech posted on the bank’s website on Friday.
“The capital flows challenge needs fresh thinking. Over the
medium term, to moderate the real exchange rate, we need fiscal
and monetary policy settings that reflect that policy objective
and seek to achieve it,” Kganyago said in the speech to an
investor fund conference in Cape Town.
Emerging markets are sensitive to exchange rate volatility
as near-zero interest rates of developed economies lead
investors to seek yields in the riskier but higher yielding
emerging market assets.
“The impact on countries like South Africa is capital flows
to our countries looking for better returns and this poses a
challenge for us, to manage the capital flows so that they don’t
lead to exchange rate misalignments,” Kganyago said in emailed
comments.
The rand gained about 30 percent on the dollar
between 2009 and 2010 but lost about the same amount between
August and November last year when it tumbled to a two-year low,
showing its sensitivity to global risk sentiment. It is up 7
percent so far this year.
Powerful labour unions, allies of the ANC led government,
have bemoaned the currency’s strength, putting pressure on
government to limit its gains.
The central bank has previously ignored pressure to take
action such as taxing capital inflows like some emerging markets
economies have done, saying they do not target a level on the
rand.
Kganyago joined the policy setting committee of the Reserve
Bank in May 2011 and was making the first governors’ speech for
the year, which could signal the bank may be ready to rethink
its policy on the rand exchange rate.
The European Central Bank on Wednesday announced a second
long term liquidity injection, money that analysts say will
likely fund carry trades, where investors use lower yielding
currencies to buy emerging market assets.
Continued…
