Reserve Bank governor Gill Marcus. Photo: Simphiwe Mbokazi.

Cape Town - South African Reserve Bank Governor Gill Marcus said while the state of the economy has justified accommodative interest rates, they can’t remain indefinitely.

The bank left its benchmark lending rate unchanged at 5.5 percent on March 27, while warning borrowing costs may be raised in the future to curb inflation that’s been spurred by a weaker rand.

Three of the seven members of the bank’s Monetary Policy Committee backed a rate increase.

“Accommodative policy has been considered appropriate given the developments in the real economy,” Marcus said in a speech prepared for delivery in London that was published on the central bank’s website yesterday.

However, “pressures from the exchange rate and capital flows, and the possible normalisation of monetary policy in the US, imply that this stance cannot be maintained indefinitely. This does not mean that we blindly follow US monetary policy.”

The Reserve Bank joined emerging-market nations that tightened monetary policy as the Federal Reserve jolted investors with the start of stimulus cuts.

The rand’s 19 percent slump against the dollar last year and 5.7 percent drop in January worsened the inflation outlook and prompted the bank to raise the key rate by half a percentage point in the first month of the year.

The currency has since erased its 2014 loss, adding 0.3 percent this year to ease price pressures.

It traded 0.1 percent higher at 10.4566 by 9:58 a.m. in Johannesburg today.

Post Crisis

“The real policy rate is still slightly negative, and well below what could be considered the neutral rate,” Marcus said.

“At this stage we do not have a clear view of what the longer term post-crisis ‘new normal’ neutral interest rate will be, either in South Africa or at a global level. We do know that some adjustment will be required. The context will determine how pre-emptive or reactive we will be.”

The central bank’s mandate requires it to keep consumer inflation to within a 3 percent to 6 percent band, while taking into account the effect interest-rate decisions will have on growth and unemployment.

Inflation is expected to average 6.3 percent this year, with a breach of its target likely in the second quarter.

The rate was 5.9 percent in February.

While the weaker rand’s pass-through to consumer prices has been relatively constrained to date, the exchange rate remains a “significant” risk to the inflation outlook, Marcus said.

Domestic Risks

The economy’s performance since the end of the global financial crisis has been “disappointing” and with growth forecast at 2.6 percent this year and 3.1 percent in 2015, minimal progress would be made in reducing a 24.1 percent unemployment rate, Marcus said.

Electricity-supply constraints and a strike by platinum miners are the main domestic risks to the growth outlook, she said.

“For some time now, the Monetary Policy Committee has had to face the dilemma of a relatively subdued growth environment and a rising trend in inflation,” she said.

“Monetary policy will play its role, but it cannot solve the underlying structural problems. We will continue to ensure a stable macroeconomic environment and a well-regulated financial sector, within a flexible inflation-targeting environment.” - Bloomberg News