chrislbecker.com

A weak Rand policy is an anti-poor policy, because those people with no incomes (unemployed) and those on fixed incomes (pensioners, labourers, workers, etc) cannot keep up with the rate of broad money growth, and resulting price inflation.

The Reserve Bank is tasked with weakening the Rand by between 3-6% each year against goods and services (inflation targeting). However, the Reserve Bank cannot control which product prices increase by more than this level, or which increase by less than this level (or decline).

South African Government News Agency reports:

Pretoria – Cabinet has expressed concern at the escalation of food prices and the impact it is having on the poor.

According to a Cabinet statement, issued by Government Communications (GCIS) on Friday, the Minister of Agriculture, Forestry and Fisheries Tina Joemat-Pettersson will brief Cabinet on the matter at the next Cabinet meeting.

According to analysts, South African consumers should brace themselves for higher increases in food prices over the coming months. This as food inflation is expected to increase to between 12 and 15 percent in the next six to eight months. – SAnews.gov.za

The most effective way of minimising the impact of price inflation on the poor is to allow the Rand to strengthen and to have price deflation. If the Reserve Bank dropped the price inflation target of 3-6%, and allowed the Rand to strengthen against the US dollar to a much greater degree, food prices could fall from here. They do not have to increase. Farmers should not be alarmed by this, because a strong rand policy would mean that input costs such as fuel, tractors, and other capital equipment, including labour would fall at a faster rate than food prices.

The corn price has climbed from levels of $6 per bushel in May to $7.95 today, a near 40% increase in three months.

Corn price per bushel, US $.

Because the Rand has weakened against the US dollar, the Rand price of corn has climbed even more than the dollar price of corn.

USD-ZAR chart.

If the Reserve Bank was to “protect the value of the Rand”, as it is supposed to under the Constitution, it would be forced to let the Rand strengthen 3-6% every year, rather than weakening it. If the Reserve Bank intervened in the market to strengthen the Rand, and the USD-ZAR declined to 5.50 today rather than rise to 8.13, corn prices in Rand terms would be unchanged since May at R43 per bushel.

This would protect the poor, encourage saving and investment, resulting in long-term capital formation which is what this country needs after seven decades of growing government, failed central planning and racist social engineering.