The South African Reserve Bank (SARB) said on Tuesday in its latest Monetary Policy Review that the breach of the 3%-to-6% inflation target is of “significant concern” to the monetary policy committee (MPC).
Inflation in South Africa breached the upper end of the inflation target range for the first time since August 2003 in April this year. It has been above the target persistently for six months.
“The pressures which were primarily responsible for the breach in the inflation target range were largely exogenous, emanating from oil and food price shocks, and have posed a challenge to many central banks around the world,” said the SARB.
“However, given the potential impact on inflation expectations, more generalised price-setting behaviour and monetary policy credibility, the breach of the inflation target is of significant concern to the MPC of the SARB,” it added.
“The most important challenge for monetary policy-makers is to ensure that inflation is brought back to within the target range and that inflation expectations remain anchored within the range,” it emphasised.
The bank added that some of the key inflation risks have proved “persistent” since the previous review was published in May, and there has been “significant volatility” and “uncertainty” in the international environment.
However, it concluded that there are “some signs” that the economy is responding to the changes that have been made to the monetary policy stance. Rates increases of 350 basis points have been implemented since June last year.
“As inflation reacts with a lag to these changes, the task of the MPC is to assess whether the observed inflation response at a particular point in time is consistent with the desired return to within the target range in future,” concluded the SARB.
Emerging generalised inflation
The bank also said that the MPC is mindful of the need to act against emerging generalised inflation pressures. Although the breach of the inflation target can be seen as a setback for monetary policy, the main drivers are beyond the direct influence of monetary policy.
“However, the MPC is mindful of the impact of these developments on inflation expectations,” added the SARB.
The most recent inflation expectations of the bank suggest inflation should return to within the target range during the second half of next year.
“Monetary policy will continue to be applied to ensure this outcome is achieved,” said the SARB, noting that excluding food from CPIX has a “significant impact”.
Research showed that the rate excluding food increased from 4,5% in March this year to 5,5% in April, declined to 4,5% in August and rose to 4,8% in September. The inflation rate for CPIX excluding both food and energy was shown to have “trended upwards” in the period under review, increasing from 4,4% in March to 4,9% in September.
Added to this, the SARB noted that the year-on-year inflation rate for the administered price index increased from 6,3% in March to 8,3% in April, then declined to 5% in August before moving higher to 5,8% in September.
However, excluding petrol prices, the API inflation rate decreased from 5,8% in March to 5,5% in May, rose to 7,4% in August and then declined to 7% in September. — I-Net Bridge