The consumer inflation rate was above the ceiling of the central bank’s target band and could rise further in a deteriorating domestic economic environment, deputy Reserve Bank governor Daniel Mminele said on Tuesday.
“Monetary policy in South Africa is currently facing an increasingly challenging situation, as the domestic economic growth outlook has deteriorated markedly even as inflation broke out of the target range,” he told financial market professionals in Pretoria.
Inflation rose above the expectations of the central bank and the market last month when it came in at 6.6 percent.
Mminele said domestic demand had slowed, and the current rate tightening cycle, aimed at fighting off inflation, “need not match the speed and magnitude of earlier cycles”.
The last tightening cycle came between mid-2006 and mid-2008 when rates were raised from 7 percent to 12 percent.
A weakening rand has been a major cause of higher prices, hitting a string of five-year lows at the beginning of the year when the central bank hiked the repo rate by 50 basis points to 5.5 percent.
The currency has since stabilised and was trading at R10.58 to the dollar yesterday, after the Association of Mineworkers and Construction Union and platinum producers came to a resolution to end a crippling five-month platinum-sector strike on Tuesday.
However, Mminele warned that South Africa’s bond market, supported by carry trade activity last month, could be vulnerable to risks of a fresh debt sell-off globally, while domestic stocks appear increasingly expensive.
He said the market should not expect policymakers to keep commenting directly on short-run market movements, as this could add to volatility.
Meanwhile, in a note in the bank’s annual report released yesterday, governor Gill Marcus said during the past year, the global financial crisis had entered a new phase, one that was no less challenging for South Africa than the previous phases. She said the global recovery had remained slow and uneven, with the US and the UK showing the most sustained signs of recovery.
The euro zone had emerged from the recession early this year but slow growth was expected to persist.
She said the South African economy faced a very challenging environment against this global backdrop, with domestic issues adding to the difficulties.
“The environment for monetary policy became increasingly challenging under these conditions, with the inflation outlook deteriorating as the economy weakened.”
In January pressures from the exchange rate and food prices saw a significant upward revision of the inflation forecast: inflation was expected to breach the 6 percent upper end of the band for an extended period of about four quarters, from the second quarter, and to peak at around 6.6 percent in the fourth quarter.
In line with this forecast, inflation measured 6.1 percent in April, Marcus said.