South Africa Inflation Near Top of Target Limits Policy Options

Johannesburg, South Africa, Capital Markets in Africa: South Africa’s Monetary Policy Committee has little room to delay acting while inflation and price-growth expectations are hovering near the ceiling of its target range, according to the Reserve Bank.

The contribution of monetary policy “is to prevent the temporary increase in specific prices from becoming a permanent acceleration in overall inflation,” the central bank said in its annual report for the year through March 2016, released on its website on Friday. “As most measures of underlying inflation and inflation expectations are already close to the top end of the inflation target range, there is little space to defer a policy response.”

While inflation slowed to 6.1 percent in May, the lowest rate this year, the central bank has forecast price growth will only return to its 3 percent to 6 percent target band in the third quarter of next year as a weak rand and the worst drought in more than a century keep costs elevated. South Africa’s monetary policy dilemma of high inflation and slow growth became more pronounced after the economy contracted in the three months through March, Governor Lesetja Kganyago said on June 22.

“Policymakers are cognizant that growth is very subdued,” the central bank said. “In recognition of this challenge, the current interest-rate hiking cycle has been slower than any in recent history.”

The Reserve Bank’s Monetary Policy Committee left the benchmark repurchase rate unchanged at 7 percent last month after raising it four times since July. The MPC will announce its next interest rate decision on July 21.

The rand weakened 4.4 percent to 15.0786 per dollar as of 11:09 a.m. in Johannesburg after the U.K. voted to quit the European Union, roiling global markets. Yields on rand-denominated government bonds due December 2026 rose 19 basis points to 9.07 percent.

“Even at low levels of pass-through, marked rand depreciation has appreciable inflation consequences, and there are some risks that pass-through may revert closer to historical norms,” the central bank said.

The Reserve Bank increased Kganyago’s total remuneration to 6.33 million rand from 4.78 million rand, according to the annual report. The central bank’s total profit rose to 1.58 billion rand from 627 million rand.

Source: Bloomberg Business News