Johannesburg - South Africa’s benchmark interest rate will need to rise to curb an inflation rate that’s “uncomfortably high,” Reserve Bank Deputy Governor Daniel Mminele said.
Inflation “risks continue to be tilted to the upside,” Mminele said in a speech yesterday in Pretoria.
“Interest rates will have to normalise in due course.”
The central bank faces a policy dilemma as inflation exceeds its 3 percent to 6 percent target while the economy contracted in the three months though March.
The bank left its benchmark repurchase rate unchanged at 5.5 percent at the last two meetings of the monetary policy committee.
“The current rate-hiking cycle will need to be responsive to incoming data,” Mminele said.
The acceleration of inflation to 6.6 percent in May exceeded expectations and the figure may remain outside the target for an extended period, Mminele said.
This reflects the impact of the rand’s depreciation on consumer prices, he said.
The rand has weakened 1.4 percent against the dollar this year.
The currency was little changed at 10.6459 at 7:27 a.m. in Johannesburg.
“The current rate cycle need not match the speed and magnitude of earlier cycles,” Mminele said.
Reserve Bank Governor Gill Marcus said on June 10 the January interest rate increase wasn’t a “one-off move” and raising the benchmark rate by 25 basis points is a possibility.
The MPC hasn’t adjusted borrowing costs by less than 50 basis points since 2000.
The protracted period of low interest rates in developed economies has increased the risk of earning negative returns on South Africa’s foreign reserves, said Leon Myburgh, head of financial markets at the Reserve Bank.
This has lead the bank to start investing in government bonds of China, South Korea, Japan, Australia, Sweden and Canada. - Bloomberg News