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To: RealMuLan who wrote (71928)	12/3/2007 12:13:11 AM
From: Chispas	Read Replies (3) \| Respond to of 116555

"SA is importing inflation by accumulating dollar reserves" Cape Town, December 03, 2007 There has been much talk about the central bank's focus on controlling inflation, which has been used to justify the interest rates hikes over the past 18 months. Now a bizarre situation is occurring: the central bank is encouraging dollar-led inflation through the continual purchase of dollars and sale of rands into the foreign exchange market. Over the past 18 months the Canadian dollar and the Australian dollar have appreciated by 13 percent and 15 percent, respectively, against the US dollar, while the rand has depreciated by 11 percent, despite our economy being driven by the same fundamentals. What impact can this have? The price of a barrel of crude oil, in Aussie dollar terms, is up only 13 percent during this period, whereas in rands it is up an enormous 49 percent. By following a policy of a weaker rand, or one pegged to the dollar, we are importing US dollar-led inflation. The argument that this enables us to maintain a competitive manufacturing base is destroyed by the fact that inflation is used by organised labour to push for higher wage increases. This raises our cost of production, nullifying the effect of the weaker currency. Devaluing one's currency has never proved to be a long-term sustainable way to build an export franchise. (Zimbabwe is a case in point.) So we sit in a curious position: an institution that, on the one hand, is pushing up inflation through a policy of continuous reserve accumulation and, at the same time, punishing the consumer with a series of interest rate hikes to supposedly reduce inflation. As long as food and energy prices continue to rise, inflation expectations will remain high. This fascination with building reserves and keeping a weaker rand only serves to damage the inflation psyche of the public at large. One cannot ignore the cost to the fiscus that is incurred as the public carries the cost of the high domestic interest rate to fund the buying of low-yielding dollars. Dollar reserves over the past 18 months have grown to $32.8 billion (R223 billion) from $23.8 billion - a growth rate of 32 percent. Why are we still building these? To sterilise this reserve, the fiscus has to borrow in rands (at ever-increasing rates) and earn a much lower US dollar rate. This means the taxpayers who are suffering from higher interest rates also have to pay for importing inflation. It is time that the central bank and the treasury begin to think more about all the other available options to control the inflation scourge and how to deal with a world where a weak dollar is prevalent. Our largest trading partner is the euro zone, where we have seen an enormous 32 percent decline in the value of the rand over the past 18 months. No wonder the cost of the new Eskom power stations continues to rise, as all the technical equipment is imported from Europe. We will be living with that cost inflation for the next 30 years. .............................................................. busrep.co.za