Johannesburg - Reserve Bank Governor Lesetja Kganyago warned yesterday that the bank was concerned about the inflation outlook and the extended breach of its target.
Kganyago said although the inflation forecast had shown a moderate improvement over the medium term, the risks were still assessed to be on the upside. “The exchange rate remains highly sensitive to domestic political developments and risks of an earlier-than-expected tightening in US monetary policy,” Kganyago said. “The exchange rate implicit in the forecast is stronger than the current level, imparting a significant degree of upside risk.”
Yesterday, the bank left its benchmark repo rate unchanged at 7 percent, saying that moderating pressures to long-term inflation left it room to pause in its tightening cycle.
Kganyago said while pass-through from the exchange rate to inflation remained relatively subdued, there were indications that this might be increasing. He said there was also some upside risk to the international oil price assumption.
Minutes from the Federal Reserve’s last meeting caught the market off-guard by revealing most policymakers thought a June rise would be “appropriate” if the US economy continued its recent improvement. That suggested the central bank was closer to lifting rates again than most investors had expected and saw a scramble from traders to readjust.
Kganyago said although consumer price index inflation had moderated since February, the respite was expected to be temporary, as food and petrol price pressures continued to intensify. The recovery in the rand exchange rate in April also proved to be short-lived, as both domestic and external factors weighed on the currency.
“At the same time, domestic economic growth continues to disappoint. While there are signs that the economy may be reaching the low point in the growth cycle, the recovery is expected to be slow with downside risks.”
Target band
The Reserve Bank has raised lending rates by a total of 100 basis points at its previous three meetings, as it fought to keep headline inflation within its target band of between 3 to 6 percent as severe drought and a weaker currency weighed.
The rand weakened slightly after the decision, easing to R15.9735 against the dollar. The bank lowered its inflation forecast for the next three years, but economic recovery would be slow. Kganyago said five members of the monetary policy committee (MPC) preferred no change, while one preferred a 25 basis point increase.
He said while headline consumer prices would average 6.7 percent in 2016, up from a previous forecast of 6.6 percent, inflation in 2017 and 2018 would moderate. “The MPC remains focused on its inflation mandate, but sensitive… to the state of the economy.”
Inflation stood at 6.2 percent in April versus 6.3 percent in March, data showed on Wednesday. “
The MPC will not hesitate to act appropriately should the inflation dynamics require a response, within a flexible inflation targeting.”
Upside risks
Kganyago said inflation and growth dynamics continued to highlight the policy dilemma facing monetary policy. The MPC faced the continuing dilemma of upside risks to the inflation forecast and worsening growth outlook.
“The risks to the growth outlook are assessed to be on the downside, particularly in the short term, despite the downward revision of the forecast. Both the mining and agricultural sectors are expected to weigh heavily on the first quarter growth outcome, and the outlook is therefore dependent in part on whether these sectors rebound in the coming quarters.”
Sanisha Packirisamy, an economist at MMI Investments and Savings, said poor domestic macro fundamentals elevated uncertainty around the direction of economic policy and a stagnating reform agenda were, in addition to global headwinds, likely to curb local growth this year and next.
“Growth in household consumption is likely to buckle under pressure in the near term, given lower growth in real wages and grim employment prospects. While upper-income household have de-levered significantly since the global financial crisis, a rising interest rate environment points to a rising debt-servicing burden.”
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