It has recently become evident that inflation has become more generalised, and inflation expectations have also deteriorated somewhat, South African Reserve Bank (SARB) Governor Tito Mboweni told the 88th ordinary general meeting of the shareholders of the bank on Thursday.
He noted that CPIX inflation at a current 13% is “clearly very high”.
Added to this, he pointed to the fact that since early 2008, the rand has had a “major impact” on the inflation outcome, as did the trend in unit labour cost and electricity price developments.
He emphasised that to prevent second-round effects it is important that inflation expectations remain “well anchored”.
“Failure to respond appropriately could inevitably cause expectations to become dislodged and result in a further acceleration of inflation. The bank remains committed to bringing inflation back to within the target within a reasonable timeframe,” he said.
Mboweni said “anchor” means that expectations need to be on the low side.
He also said that asset price developments in the form of lower equity prices and a subdued housing market reduce the pressure on inflation emanating from wealth effects.
He also hopes that lower oil prices will last for a long time.
On the fact that inflation has been outside the target band, he said that a flexible inflation targeting regime should allow for temporary deviations in the event of exogenous shocks in order to avoid “excessive output variability”.
Global and domestic developments are expected to continue to pose challenges for the Reserve Bank in the coming year, Mboweni said.
However, the South African banking sector has been relatively insulated from the global financial-market uncertainties, but greater vigilance has been required in supervising and regulating the sector.
He also mentioned that the current level of official gross gold and foreign-exchange reserves is not excessive, and reserves will continue to be accumulated at a moderate pace when market conditions permit. — I-Net Bridge