South Africa’s near-term inflation outlook remains disappointing and the central bank will consider the necessary steps to bring it within the target range, central bank Governor Tito Mboweni said on Thursday.
”The near-term expectations for domestic inflation remain somewhat discouraging as the acceleration in CPIX inflation is caused, in the main, by rising commodity and food prices,” he said in the Reserve Bank’s 2007/08 annual report.
South Africa’s targeted CPIX inflation climbed to a record 13% year-on-year in July and the main drivers have been food and fuel prices. It has been outside the central bank’s 3% to 6% target band since April 2007.
Mboweni said the bank would consider the necessary steps to bring CPIX to within the target over a reasonable period.
The bank said some of the risks have eased. ”While the risks to the inflation outlook remain, some of these appear to have moderated somewhat. The future stance of monetary policy will be determined by the expected evolution of the determinants of inflation.”
The central bank said its central forecast for inflation was ”complicated” by the rebasing and the re-weighting of the consumer inflation basket that will be used in the January 2009 release.
It said inflation would peak around 13% in the third quarter of 2008 then decline significantly in the first quarter or 2009, partly as a result of the technical adjustments, then fall gradually to below the upper end of the target band in the second quarter of 2010.
Trade deficit narrows
The Reserve Bank said that the trade deficit narrowed significantly in the second quarter and net capital inflows on the financial account were sufficient to finance the deficit on the current account.
These inflows were also reported to be sufficient to allow for a further increase in the net official holdings of international reserve assets.
The SARB noted that export volumes had benefited considerably from the recovery in mining and manufacturing production in the second quarter, while
prices of export commodities were also favourable.
”Together, these developments brought about a significantly smaller deficit on the current account,” said the SARB. The deficit was -7,3% from -8,9% in the first quarter.
The Bank did note that net service, income and current transfer payments to the rest of the world remained at high levels.
It explained that capital inflows in the second quarter mainly comprised net portfolio and other investment capital. It said this was different to the first quarter where foreign direct investment inflows featured
prominently.
The SARB said after depreciating by about 20% during the first quarter, the external value of the rand ”recovered moderately” in the second. – Reuters, I-Net Bridge