Cape Town - Government is not planning to intervene to weaken the rand that has helped to cushion the impact of higher oil and food prices, Finance Minister
Pravin Gordhan said on Wednesday.
The government's rand policy is a touchy issue between the ANC and its leftist allies who would rather see the currency weakened and Gordhan's comments could add to ongoing tensions in the alliance over policy.
The rand has gained more than 30% against the dollar since the beginning of 2009. It hit its strongest levels in more than three years this week and was last trading at 6.64.
"At this stage we are not planning on intervening," Gordhan said on the sidelines of the World Economic Forum (WEF).
Gordhan told SABC TV earlier on Wednesday that it was fortunate that the biggest economy in Africa was experiencing a strong currency, adding had it not been for the rand's gains, fuel and food prices would be much higher.
Like other emerging markets, strong capital inflows into South Africa in the wake of loose monetary policy in developed countries have been the main driver of the rand's gains.
Gordhan said the government was still concerned about the impact of short-term capital inflows. South Africa rejected the idea of implementing a tax on capital inflow, like other countries such as Brazil, but has opted to raise its foreign exchange reserves to limit rand gains.
Overvalued randInflation has been within the central bank's target of between 3% and 6% since February 2010, and the central bank expects it to stay in that band until the end of 2012. It stood at 4.1% year-on-year in March.
South Africa's benign inflation environment has allowed the central bank to keep the repo rate steady at 5.5% at a time when other emerging markets are starting to tighten monetary policy.
Analysts expect South Africa to start raising interest rates only towards the end of the year, after decreasing them by 650 basis points between December 2008 and December 2010.
The rand's gains have hurt the manufacturing sector, Gordhan acknowledged. "It does have a negative impact on manufacturing," he said.
At current levels, it is considered too strong by manufacturers who would rather see it trading above 8.00 to the dollar.
The sector was the hardest hit by a recession in 2009 and although it is on a recovery, output levels are still below pre-recession levels.
Trade Minister
Rob Davies, a left-leaning cabinet member, said the currency was overvalued but did not say what currency policy the government should pursue.
"The rand is overvalued due to the continued uneven nature of the world economic recovery and the policies that are being followed by some of the major players," Davies said at the WEF.
"The overvalued rand is still hitting us in the value-added sectors," he added.
With a quarter of the labour force jobless, South Africa has to balance the impact of the rand on inflation with ensuring that the currency does not strangle key sectors such as manufacturing and constrain economic growth.