Johannesburg - The risks to South Africa’s inflation outlook are skewed to the upside and price pressures have increased, Reserve Bank Governor Daniel Mminele said.
“There are indications that exchange rate impacts, particularly the lagged impacts from past depreciations, are starting to feed through into consumer price inflation,” Mminele said in a speech posted on the central bank’s website today.
“While inflationary pressures may not be of a demand- pull nature, second-round price effects from supply-side shocks need to be contained.”
The rand has lost 21 percent against the dollar since the start of last year, the worst performer of 16 major currencies tracked by Bloomberg, helping push inflation above the upper end of the central bank’s 3 percent to 6 percent target range.
The Reserve Bank has raised the benchmark repurchase rate by three quarters of a percentage point to 5.75 percent this year.
“The MPC has indicated that we are in a tightening phase of the interest rate cycle,” Mminele said.
“While price stability remains the primary focus of monetary policy, the Bank has indicated that this objective will be pursued in a manner so that economic growth outcomes are not unduly undermined.”
The Monetary Policy Committee’s dilemma is compounded by inflation being outside the target range while economic growth is weak, Mminele said.
CPI will probably average 6.3 percent this year and 5.9 percent in 2015 while growth will slow to 1.7 percent from 1.9 percent last year, he said.
Consumer prices rose 6.6 percent in June from a year earlier, according to the statistics agency.
“It is important to bear in mind that monetary policy cannot address structural deficiencies in the economy and influence long-term growth,” Mminele said.
Retail sales were unchanged from a year ago in June, the weakest performance since December 2009, the Pretoria-based statistics office said today.
Africa’s second-largest economy shrank by 0.6 percent in the three months through March, the first contraction since a recession five years ago.
The rand gained 0.1 percent to 10.6179 per dollar at 1:37 p.m. in Johannesburg, paring the decline in 2014 to 1.2 percent.
Forward-rate agreements starting in six months, used to speculate on interest rates, fell two basis points to 6.43 percent, signaling another 37 basis points of rate increases this year.
Job creation and unemployment, which rose to 25.5 percent in the three months through March, remains the most important economic challenge confronting South African policy makers, Mminele said.
“There is little doubt that the envisaged growth outcomes of around 3 percent over the next two years are insufficient to make meaningful inroads into the unemployment problem that we face in South Africa,” he said.
The government, through its 20-year National Development Plan, is targeting growth of 5.4 percent to help cut unemployment. - Bloomberg News