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Reserve Bank in policy ‘bind,’ Mboweni says

Former central bank governor ‘very concerned’ about the rand.

South Africa’s Reserve Bank is in a policy “bind” and will need to raise interest rates at some point despite a slowing economy, former central bank Governor Tito Mboweni said.

“They’ve been boxed in very badly,” Mboweni said on Wednesday in an interview with Bloomberg TV in London. “They will have to bite the bullet at some stage.”

The rand’s slump to a record low this year is adding to pressure on inflation, forcing the Reserve Bank to raise the benchmark interest rate twice since July last year to 6%. Governor Lesetja Kganyago kept the rate unchanged in September to support an economy that’s threatened with recession.

Mboweni, 56, said he was “very concerned” about the rand, which has dropped 14% against the dollar this year. While the currency may rebound because of “technical factors,” a slowdown in China and the prospect of higher interest rates in the US are weighing on the currency’s outlook, he said.

Policy makers in South Africa are doing the right thing by not intervening in the foreign-exchange market to influence the level of the rand, Mboweni said. Actions taken by Nigerian central bank governor Godwin Emefiele to run down reserves and impose foreign-currency controls aren’t working, he said.

“It is a very bad idea to try massive currency interventions,” Mboweni said. “It doesn’t work, we have learned the hard way in South Africa.”

During his tenure as governor of the Reserve Bank from 1999 until 2009, the benchmark rate was raised to as high as 13.5% to fight inflation. The Reserve Bank ran up debts of as much as $24 billion in 1998 defending the currency against speculators. Mboweni helped to eliminate the debt in 2003 and started building reserves, which now stand at $46 billion.

©2015 Bloomberg News

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