Gordhan defends inflation targeting

FINANCE Minister Pravin Gordhan defended the government's inflation-targeting policy yesterday, saying it gave investors confidence and the central bank options in times of crisis.

FINANCE Minister Pravin Gordhan defended the government's inflation-targeting policy yesterday, saying it gave investors confidence and the central bank options in times of crisis.

Labour unions have repeatedly urged the government to scrap or change its policy of targeting an inflation rate of between 3 and 6percent, saying strict adherence had led to higher interest rates that hurt the poor.

"Our inflation-targeting framework has proven itself in the past as a valuable signal for credible policy, which provides investors with confidence in times of crisis and flexibility for the Reserve Bank to respond appropriately during a crisis," Gordhan said in a written statement to Parliament.

The government has been forced to defend its policy repeatedly in recent months against a campaign by South Africa's powerful Cosatu labour federation, which is an alliance partner of the ruling African National Congress.

In February Gordhan wrote a letter to the central bank giving it more leeway to consider factors such as growth and financial stability when setting interest rates.

SA's Reserve Bank raised interest rates by 500 basis points between June 2006 and June 2008 to try to contain rising inflation.

It unwound those increases between December 2008 and August 2009 and the interest rate is now at a three-decade low of 6,5percent. But Cosatu wants deeper cuts.

Consumer spending remains depressed, threatening to slow recovery from the first recession in 17 years and the central bank is expected to further cut rates at the next meeting of its monetary policy committee on July 22.

Gordhan's statement to parliament also defended the country's flexible exchange rate policy, another bugbear for unions that want the government to weaken the rand.

"The flexible exchange rate also acts as a buffer against shocks and helps to reduce the volatility of interest rates," Gordhan said.

Cosatu wants the government to take steps to weaken the currency to around 10,50 against the dollar. At its current levels of around 7,60, the rand is considered relatively strong, and uncompetitive for exports. - Reuters

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