South Africa to Stick to Low Inflation Plan, Central Bank Says

JOHANNESBURG (Capital Markets in Africa) – South African inflation is under control and the central bank will maintain a policy to keep it low to protect the poor and ease inequality, Reserve Bank Governor Lesetja Kganyago said.

Pursuing other priorities, such as reducing unemployment, has been shown in other countries to cause “widespread economic damage,” Kganyago said in a speech at the University of KwaZulu-Natal in the coastal city of Durban on Tuesday. The central bank expects price growth to slow to 5.4 percent next year and 5.5 percent in 2019, he told reporters at the event.

“The best way to get permanently lower interest rates is to bring down inflation — and then keep it low and predictable,” the governor said. “Inflation is under control and if it is under control it reduces poverty and inequality.”

Kganyago’s comments come after South African inflation slowed to 6.1 percent in March, and the bank expects it to decelerate to below 6 percent in the second quarter of the year. Even so, price growth remains outside the governor’s target range of 3 percent and 6 percent, where it has been for seven months.

“We have made it very clear that as far as we are concerned we would like to see inflation return sustainably to within the inflation target range and that is what we are focused on,” Kganyago said.

Price Increases
The Monetary Policy Committee has kept the benchmark repurchase rate unchanged since last March after raising it to 7 percent to try and stem price increases. Forward rate agreements, used to speculate on borrowing costs, are pricing in a 25 basis point rate cut by the end of the year.

Monetary policy has little influence over labor markets and lower interest rates are unlikely to reduce unemployment, which in South Africa was 26.5 percent in the fourth quarter of last year, Kganyago said.

Kganyago and newly appointed Finance Minister Malusi Gigaba are in charge of reviving an economy that the World Bank expects to expand less than 1 percent for the second year in a row. The central bank has forecast an expansion of 1.2 percent. President Jacob Zuma’s decision to fire Finance Minister Pravin Gordhan at the end of March prompted S&P Global Ratings and Fitch Ratings Ltd. to cut South Africa’s credit rating to below investment grade, causing the rand to plunge against the dollar.

The currency has since made up some of its losses, and traded 0.2 percent weaker at 13.0859 against the dollar as of 8:21 a.m. in Johannesburg.

Zuma has touted a policy of “radical economic transformation” to revive growth and reduce inequality. The Reserve Bank’s policy of targeting inflation is in line with the strategy of improving inclusive growth for all South Africans, Kganyago said.

Source: Bloomberg Business News