Johannesburg - A persistent breach of the South African Reserve Bank’s inflation target will require a policy response even as the country’s economic growth outlook weakens, said the central bank’s deputy governor, Daniel Mminele.
“The SARB will tolerate temporary breaches of the inflation target in the interest of smoothing out short-term fluctuations in economic growth,” Mminele said in a speech in Washington on Saturday, a copy of which was posted on the central bank’s website. “However, a persistent breach of the inflation target range will require a policy response to achieve sufficiently low inflation.”
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The Monetary Policy Committee has increased the benchmark rate four times since July to 7 percent, even as it cut its economic growth forecast for the year to 0.8 percent, the slowest rate of growth since 2009. Inflation accelerated to 7 percent in February and the central bank forecasts it will only return to its 3 percent to 6 percent target band in the final quarter of 2017.
The inflation trajectory has increased significantly during the last three months with price pressures coming from a weaker exchange rate and rising food prices, Mminele said, according to the speech. The central bank said on April 4 policymakers face the prospect of a prolonged breach of the inflation target.
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“Inflation expectations over the forecast horizon, as well as over the longer term, are uncomfortably close to the upper target level,” the deputy governor said. “Monetary policy cannot afford to be complacent and should strive to manage inflation expectations to ensure that these shocks do not result in second-round impacts and a generalised increase in prices.”
South Africa’s currency lost 25 percent against the dollar last year, adding to pressure on price growth already fuelled by high energy costs and the worst drought in more than a century. While the exchange rate has recovered from the lows experienced in December, it remains volatile and vulnerable to domestic and external developments, Mminele said.
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“While exchange rate pass-through to inflation has been low in recent years, the sustained and substantial depreciation in the currency was identified by the MPC as a significant threat to inflation outcomes over the forecast horizon,” he said. “The recovery in the exchange rate in recent weeks is welcome, and if sustained, will favourably influence the risk profile associated with the inflation trajectory over the forecast horizon.”
BLOOMBERG