South African Reserve Bank Governor Tito Mboweni sounded a warning on inflation on Thursday morning as there were, as far as he could see, no indications of any meaningful change in consumer behaviour and said there were still significant upside risks to the inflation outlook.
He added that another area of concern was the current-account deficit, which although narrowing from 6,4% of GDP in the first quarter, still “stood at a high of 6,1% of GDP in the second quarter”.
He highlighted the impact on the rand as a potential inflation worry.
“There is, however, a possible risk to the exchange rate if the deficits are perceived by the markets to be unsustainable. The recent exchange-rate reaction to the higher deficit is indicative of this, but it is also part of the adjustment process. Nevertheless, the adjustment of the exchange rate has reached levels that may pose a further threat to the inflation outlook,” said Mboweni.
Mboweni, added that it was not all doom and gloom, thanks to the lower oil price, but emphasised that the oil price was volatile.
“Fortunately it is not all doom and gloom, and there has been at least one significant improvement in the risk factors affecting the inflation outlook.
“International oil prices have offered some respite and come down from their highs of almost $80 a barrel in early August, to levels below $60.
We are aware that this positive development can change at any time, given the delicate balance between supply and demand in the oil market, and the acute sensitivity of the oil price to changes in risk perceptions. We are, nevertheless, fortunate regarding the timing of this respite,” Mboweni said.
Mboweni added that he did not anticipate that growth prospects in South Africa would be “significantly undermined” by the changes in the monetary policy stance.
“The exchange-rate developments are expected to be positive for export growth, and it will not be a bad thing if domestic growth is driven by exports and infrastructural spending, rather than by consumer spending as has been the case in the past two years,” the governor noted.
He emphasised that the Reserve Bank remained committed to keeping inflation within the 3% to 6% target band.
“Our focus, however, remains on the inflation target, and we will continue to strive to maintain CPIX [consumer price index] inflation within the 3% to 6% target range. The credibility of our actions will of course be reflected to some extent in the bond market,” he concluded. — I-Net Bridge