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Pretoria - The South African Reserve Bank (Sarb) said a moderate tightening in monetary policy will help it keep inflation under control without causing too much harm to economic growth.
The bank will resume its “interest-rate normalisation” policy should risks to the inflation forecast materialise, it said in a report released on Tuesday. “Moderate interest rate hikes are likely to achieve price stability, the bank’s primary mandate, without unduly sacrificing growth,” it said.
Rising energy and food costs and a weaker rand are putting pressure on prices, giving policy makers room to raise the benchmark repurchase rate from 5.75% for the first time since July. Inflation jumped to 4.5% in April and the central bank forecasts it will peak at 6.8% in the first quarter of 2016, above the 3% to 6% target band.
“Both electricity prices and the exchange rate could quickly shift forecasted inflation above the upper bound of the target,” the Reserve Bank said, reiterating that monetary policy is in a tightening cycle.
“The cycle that we are on is a moderate cycle and it’s precisely moderate because we are concerned about the state of the economy,” Brian Kahn, Adviser to the Reserve Bank Governor and a member of the Monetary Policy Committee, said at the Monetary Policy Forum held in Pretoria after the report’s release.
The rand has weakened 5.4% against the dollar this year and was trading as low as R12.3456 in Johannesburg on Tuesday. On Wednesday morning the rand was trading at R12.19/$.
South Africa remains vulnerable to further rand weakness given the large gap on the current account, the broadest measure of trade in goods and services, the Reserve Bank said. The deficit narrowed to 5.1% of gross domestic product in the last three months of 2014 from 5.8% in the previous quarter.
Power shortages
The deficit “is likely to become more difficult to finance as the Fed normalises monetary policy, because higher interest rates in the United States should redirect capital away from emerging markets, including South Africa,” the Reserve Bank said.
Power shortages are hampering a recovery in the economy from the slowest growth since a 2009 recession. The electricity shortfall will shave 0.6 percentage points off economic growth this year and in 2016, Chris Loewald, the head of policy development and research at the Reserve Bank, said.
“Electricity shortages have returned as a major constraint on growth,” the central bank said. “The electricity constraint will hamper growth both by interrupting production and deterring future investment.”
The energy crisis is also adding to price pressure as the state-owned utility seeks higher tariffs to help it keep plants running. An application by Eskom to raise power prices by as much as 25% could add 0.1 percentage point to inflation this year and 0.4 percentage points in 2016, according to the central bank.
