South African MPC Prefers 4.5% CPI Expectation to Hold Rates

JOHANNESBURG (Capital Markets in Africa) Anchoring South African inflation expectations at 4.5 percent will help contain price growth and limit the need for the Reserve Bank to hike interest rates, Governor Lesetja Kganyago said.

Lower inflation expectations are good news, Kganyago told lawmakers in Cape Town Wednesday. The main risks to price growth are the rand, oil costs and wage increases, and the impact of higher value-added tax has been more muted than expected, he said.

While the central bank targets inflation in a range of 3 percent to 6 percent, is has made it clear that it prefers price-growth expectations close to the midpoint of that band. The Monetary Policy Committee kept its key rate unchanged last month as it warned of upside risks to inflation from the weaker rand and higher oil costs.

The South African Reserve Bank won’t intervene to prop up the rand unless the orderly functioning of markets is threatened, Deputy Governor Daniel Mminele said this week when the currency tumbled to its weakest level against the dollar in more than two years. This was after emerging-market assets fell as Turkish President Recep Tayyip Erdogan showed no signs of backing down in its diplomatic standoff with the U.S.

Policy Credibility
It will take a long time for Turkey to restore its central bank’s credibility after the lira’s drop, Kganyago said. That credibility takes years to build, but can be easily lost, he said.

Kganyago stressed that central-bank independence is necessary to help countries retain control over policies. In December, the ruling African National Congress ratified a proposal for the state to own the Reserve Bank, which has been in private investors’ hands since its founding in 1921. The nationalization process will end up in court and will likely be a long process, Kganyago said.

“The Reserve Bank is only interested in preserving its independence,” he said.
The central bank increased its inflation forecasts for the next two years and cut the 2018 economic growth to 1.2 percent, below last year’s rate of 1.3 percent.

South African economic growth projections are worrying and won’t make a dent in the 27 percent unemployment rate, Kganyago said. The country is not taking advantage of the recovery in the global economy, while regulatory uncertainty is deterring investment in mining, he said.

Source: Bloomberg Business News