The South African Reserve Bank (SARB) will continue to target inflation within a range of 3% to 6%, Finance Minister Pravin Gordhan confirmed in his inaugural Budget address to Parliament in Cape Town of Wednesday.

He also stressed that government was committed to the Constitutional stipulation that the SARB be allowed to pursue its mandate of protecting the value of the currency, in the interests of sustainable economic growth, "without "fear, favour or prejudice".

Gordhan's remarks were made against the background of calls for the nationalisation of the bank, which is one of a handful globally that has private shareholders, and suggestions that the inflation target either be scrapped entirely, or be elevated into a new band.

In fact, Investec economist Annabel Bishop suggested recently that the band be widened from 3% to 8%, owing primarily to the fact that the anticipated double-digit South African power price increases would make it near impossible for the target to be met within the next three years.

The Bureau for Economic Research has indicated that inflation expectations remain elevated, estimating that headline inflation averaged 8,1% last year, and would come in at 7,5% and 7,7% in 2010 and 2011 respectively. Consumer price inflation (CPI) peaked at 13,6% in August 2008, but has since retreated, falling to 6,3% in December 2009.

Government is expecting inflation to average 6% during the 2010/11 fiscal period.

Power utility Eskom has requested yearly tariff increases of 35% for the three-year period between April 1, 2010, and March 31, 2013, and the National Energy Regulator of South Africa will make a final determination on the actual price increases on February 24. While Eskom is unlikely to receive the full 35% requested, few close observers believe they will receive anything less than 25%. The power prices rises of the past two years had already raised inflation by about 1,3 percentage points.

"Governor [Gill] Marcus and I have agreed that monetary policy should be conducted in a consistent and transparent manner within a flexible inflation targeting framework. The role of the Bank in maintaining financial stability will also be enhanced," Gordhan averred.

However, he added that the recent global financial crisis had illustrated the need for central banks to take a "broader view" of the economy in managing inflation, including "growth, employment trends, asset prices, financial sector stability and competitiveness of the exchange rate".

That said, he also stressed that the current inflation targeting framework already incorporated the flexibility to allow inflation to deviate from the target in event of shocks. In such cases, the SARB is required to outline the timeframe over which inflation will be adjusted back to within the target range without unnecessary instability in output and interest rates.

"A credible monetary policy framework that focuses on managing inflation is crucial to reducing long-term borrowing costs and providing confidence about the future.

"These are necessary to stimulate investment, employment and competitiveness - particularly among exporters and import-competing industries," Gordhan said, noting that, the country's current competitiveness was being negatively affected by the fact that consumer price inflation was higher than that of our trading partners.

But low and stable inflation was also important in protecting the living standards of workers and the poor.

"Improved communication with the public about the role of monetary policy in supporting growth will increase the effectiveness of the Bank in achieving its mandate.

"The Governor and I agree that ongoing assessment, discussion and commentary about our monetary policy by analysts, interested members of the public, interest groups, and the broader research community, is constructive for the emergence of a social consensus in this area over the longer-term."

LEANING AGAINST THE RAND WINDS

Meanwhile, on the contentious issue of the volatility and level of the rand, which appreciated some 33% against the US dollar during 2009 and 24% against a trade-weighted basket of currencies, Gordhan resisted the temptation of aggressive intervention.

However, he did stress the need for the SARB to take steps "to counter the volatility of the exchange rate and to lean against the wind during periods of rapid capital inflows."

"We are agreed that we need a stable and competitive real exchange rate, though in today's world this cannot be translated into a straightforward fixed price of the rand.

"Government is concerned that at certain times, rapid capital inflows that may be required to sustain investment spending have the unintended consequence of appreciating the currency.

"We have therefore agreed with the Reserve Bank that we will continue to take steps to counter the volatility . . . including reserve accumulation and further exchange control reform.

Gold and foreign currency reserves increased from $34,1-billion in 2008 to $39,5-billion by the end of January, 2010.

He said that long-term efforts to support the competitiveness of the real exchange rate included: lower wage-inflation, lower budget deficits, larger reserves and a more flexible and a dynamic economy.

"Unfortunately, there is no silver bullet in the pursuit of greater competitiveness. Macroeconomic policy, industrial policy, trade, labour market and logistics infrastructure all contribute to creating a more productive economy," the Minister averred.