Kganyago said the bank was concerned that, in the long term, consumer inflation was likely to remain “uncomfortably close” to the upper end of the targeted 3 to 6 percent range.
Statistics South Africa on Wednesday said that the country’s headline consumer inflation had slowed more than expected to 5.3 percent year-on-year in April from 6.1 percent in March, boosting hopes of a rates cut later this year.
Following the meeting of its Monetary Policy Committee, which ended yesterday, the bank erred on the side of caution, despite the slowing inflation.
“While the inflation outlook has improved over the near term, the longer-term forecast trajectory is unchanged and uncomfortably close to the upper end of the target range,” said Kganyago.
In line with expectations, the bank has lowered its inflation forecast for this year from the previous 5.9 percent to 5.7 percent, while the forecast for next year had moderated by 0.1 percentage point to 5.3 percent.
The forecast average for 2019 remained unchanged at 5.5 percent, said Kganyago.
Kganyago was non-committal about the prospects of a rate cut in the second half of this year. In reaching its decisions, the bank considered a number of inputs, which included external surveys, he said.
“We do not follow any of this mechanically. That is why you have a committee that must deliberate and say what do all of these tell us and on the basis of the totality of all those factors we arrive at a decision of hold, cut or hike.
“Does this mean a cut in the year? I do not know why people run ahead of themselves. The policy horizon is 12 to 18 months horizon.
"If you think that you want to study where monetary policy is going, you should be looking at the inflation forecast of 2018 and 2019. The statement refers to the fact that we are still uncomfortable that the forecast is at the upper end of the target range,” said Kganyago.
A reduction in rates was possible should inflation continue to fall and the forecast over the policy horizon be remain within the 3 to 6 percent target range, he said. “However, in the current environment of high levels of uncertainty, the risks to the outlook could easily deteriorate, and derail the current favourable assessment,” he said.
He singled out the rand volatility and electricity prices among factors that posed significant risks to the inflation outlook.
Old Mutual Investment Group senior economist Johann Els said that the country could still see one rate cut before the end of this year, with two more cuts next year. Els said inflation could drop to below 5 percent by July this year.
“Given this and the current environment, we still expect the Reserve Bank to cut interest rates this year. After the cabinet reshuffle in April we revised our forecast, taking away one of the two cuts expected for the second half of 2017 and shifting it into 2018 instead. Therefore, we now expect one cut later this year and two next year,” he said.
FNB chief economist, Sizwe Nxedlana, said yesterday that the bank once again erred on the side of caution as the balance of risks to the inflation outlook remained tilted to the upside.
Nxedlana said the bank had reached the peak of the hiking cycle.