Moscow - The South African Reserve Bank (Sarb) has little room to manoeuvre on borrowing costs in the face of accelerating inflation, deputy governor Daniel Mminele said.
There are “upside” pressures on inflation and “we have much reduced flexibility in that regard, but we are not on any pre-set course and we remain data dependent”, Mminele said in an interview in Moscow on Tuesday. “We are ready to act when we think that the situation warrants it.”
READ: Sarb: SA rate moves will be highly data-dependent
Sarb has kept its benchmark repurchase rate unchanged at 5.75% for a year as the economy recovers from the slowest growth since a 2009 recession. Inflation quickened to 4.6% in May from 4.5% in the previous month and will exceed 6% in the first quarter of next year, according to Sarb.
The main risk to inflation is coming from the currency, said Mminele. The prospect of rising electricity prices also poses a threat, he said.
“The exchange rate is probably the single most important risk factor” for inflation, Mminele said. “Exchange rate risks are rising from interest rates changes and normalisation in advanced economies.”
The rand weakened 0.2% and traded at R12.4735 per dollar as of 07:43 in Johannesburg on Wednesday, bringing its decline since the start of the year to 7.2%.
Eskom threat
While Eskom had its application rejected last month for a higher-than-planned tariff increase in 2015, the power utility may reapply to raise its prices, said Mminele.
The economy’s growth potential has eroded after several years of weak expansion, Reserve Bank governor Lesetja Kganyago said in an interview last month. Consumer confidence fell to a 14-year low in the second quarter and the economy is forecast to expand 2% this year compared with 1.5% in 2014.
READ: Consumer confidence nosedives
“Nobody likes high interest rates, so it may well indeed affect consumer confidence, but what is important is of course that we look at the totality of the economy in terms of what might be required,” Mminele said.
The economic crisis in Greece could affect South Africa if investors begin to sense heightened risk in the equity, currency and bond markets, Mminele said.
“Markets have been relatively muted,” he said. “Clearly the biggest concern at the moment is around the risks that the Greek banking system is facing.”
The monetary policy committee is scheduled to announce its next decision on July 23.