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Cape Town – The South African Reserve Bank (Sarb) will tolerate temporary breaches of its inflation target of between 3% to 6% to smooth out short-term fluctuations in economic growth, according to Deputy Governor Daniel Mminele.
Consumer inflation stood at 7% in February, up from 6.2% in January and 5.2% in December 2015.
“Inflation is currently outside the inflation target range and the latest forecasts suggest it will return to within the target band only in late 2017,” he told an investor seminar in Washington on Saturday.
Mminele said inflation is expected to peak at 7.3% in the fourth quarter of 2016. “(It will) only return to within the target range during the fourth quarter of 2017. This represents a protracted breach implying that underlying pressures remain elevated.”
South Africa's top finance leaders, including Mminele and Finance Minister Pravin Gordhan, are in Washington for the International Monetary Fund and World Bank spring meetings.
While there, Gordhan said he met rating agencies to update them and investors on South Africa's economic revival programme.
“We have meetings scheduled with Standard & Poor’s and Moody’s for today (Sunday) and those meetings are not about negotiating anything: it’s largely about responding to the information needs they have, that might help them,” Gordhan told Business Report.
In his speech, Mminele cautioned that “over the long run, South Africa’s growth prospects are best served by keeping inflation within the target range, and not by looking to exploit a temporary trade-off between growth and inflation”.
Mminele said some of the inflation risks previously identified had materialised earlier and more forcefully than expected.
“Under these circumstances, 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,” he said.
Food price increases to hit inflation
Mminele said food price increases would impact consumer prices with a lag.
“Following sharp increases in agricultural food prices in earlier months as a result of the severe drought conditions, food price inflation increased markedly by 1.8 percentage points to 8.8% in February 2016 - the highest level since August 2014,” he explained.
“According to the most recent estimates (February 2016), the agricultural land or area under cultivation will be approximately 26% smaller than last year,” he warned.
“Maize… will have to be imported in the coming year in order to meet the annual domestic and commercial consumption of roughly 9.6 million tonnes.”
Rand brings good news
The Sarb welcomed the recovery in the rand’s exchange rate in recent weeks. “If sustained, (it) will favourably influence the risk profile associated with the inflation trajectory over the forecast horizon,” said Mminele.
The rand was trading at R14.73/$ at 09:30 on Monday, an improvement from the R16/$ lows just over a month ago.
“There has been a steady depreciation in the currency over the last five years,” Mminele said. “The rand depreciated by approximately 30% against the dollar in 2015, reaching historical lows in December 2015 mainly as a result of an adverse market reaction to domestic political developments associated with changes in the finance ministry.
“While the rand exchange rate has recovered from the lows experienced in December 2015, it remains volatile and vulnerable to domestic and external developments.
“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 monetary policy committee as a significant threat to inflation outcomes over the forecast horizon.”
