Johannesburg - The Reserve Bank is under pressure to maintain its gradual path of monetary policy tightening after annual headline consumer price inflation accelerated to 5 percent in July, as expected, from 4.7 percent in June, the fastest rate in five months.
A rate hike is expected to take place despite figures released yesterday, which show year-on-year growth in retail sales increased to 3.5 percent in June from a revised 2.3 percent in May.
Core inflation, stripped of food, petrol and energy, slowed for the second consecutive month to 5.4 percent in July from 5.5 percent, according to data by Statistics SA yesterday.
On a monthly basis, prices increased by 1 percent in July.
The rise in consumer price index inflation was partly due to a 41c per litre increase in petrol and a 12.7 percent hike in electricity tariffs.
The Reserve Bank raised its repo rate in July for the first time in a year as it forecast inflation would exceed the 3 percent to 6 percent target range by the first quarter of next year. The central bank was widely criticised for front running the US Federal Bank by raising interest rates in anticipation of the US tightening its monetary policy as early as next month.
In defence of the Reserve Bank, governor Lesetja Kganyago said on August 11 that there were conflicting views about the way the central bank should react to a change in US interest rates: pre-emptively or reactively.
“On the one hand, we are told that by acting reactively and delaying the adjustment, we will have to act more aggressively later, ultimately leading to a much higher rate. Implicit in this argument is that inflation would be higher than if we had acted pre-emptively.
“On the other hand, critics of our recent rate increase argue that by moving pre-emptively, we will be starting from a higher repo rate level when the Fed action begins, which will affect short-term growth.”
The Reserve Bank had tried to chart a middle road between the two views, Kganyago said.
Primary mandate
The bank’s primary mandate was to maintain price stability in the interest of balanced and sustainable growth. “This implies assessing the impact of our policies on inflation, output, and employment under current conditions. For this reason, our monetary policy tightening has been moderate,” Kganyago said.
Laura Campbell, an economist at Econometrix, said by raising the repo rate in July, the Reserve Bank has given the impression it intends raising interest rates to positive levels in real terms as a means of preventing distortions in the economy and protecting the rand.
The local unit yesterday touched 12.9761 against the US dollar, its lowest level since December 2001 and was trading at 12.9627 at 6pm.
* Additional reporting by Bloomberg
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