Reserve bank ready to act if inflation increases

The South African Reserve Bank will act to ensure that inflation does not breach the upper end of its target band for a prolonged period, Deputy Governor Daniel Mminele said at an investment conference in Johannesburg on Monday.

“Depending on unfolding events in the global and domestic environment, the bank stands ready, as always, to act in whichever manner is prudent,” Mminele said in his speech.

This is "in line with its mandate, to ensure that inflation does not breach the upper end of the inflation band [of 6%] on a sustained basis and results in a deterioration of inflation expectations.”

The Reserve Bank expects inflation to average 5.9% this year, up from a previous estimate of 5.8%, and to exceed its target temporarily in the third quarter, when it will average 6.3%. It has held the repurchase rate at 5% for the past year.

Risks to the inflation outlook present themselves mainly through a depreciated exchange rate of the rand, especially if such depreciation occurs very rapidly and is sustained, Mminele said.

Under pressure
The rand has lost 14% against the dollar this year, the worst performance among 16 major currencies tracked by Bloomberg. It fell less than 0.1% to 9.8903 per dollar as of 8.34am in Johannesburg on Tuesday.

The inflation rate generally rises as much as two percentage points for every 10% decline in the rand, Reserve Bank Governor Gill Marcus said. The pass-through effect on inflation has not been as severe as in the past, she said. Risks to the outlook also come from inflationary pressures arising from excessively high wage settlements and from higher food prices, Mminele said.

The rand’s decline this year is putting pressure on prices, creating a dilemma for the Reserve Bank because of a slowing economy, Mminele said in an interview last month in Moscow. Weak demand for manufactured exports and mining strikes are limiting growth in Africa’s biggest economy, which expanded at the slowest pace since a 2009 recession in the first quarter.

Risks to South Africa’s economic growth stem from relatively weak business and consumer confidence, and international factors, Mminele said on Tuesday. This has impacted private sector real gross fixed capital formation and household consumption expenditure, which is also being constrained by subdued employment growth, Mminele said.

An additional risk to growth is possible disruptions from strike action as part of current wage negotiations in various industries, he said. The global growth outlook has improved “only marginally”, he said. – Bloomberg

Rene Vollgraaff
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