Inflation targeting: Sarb's no. 1 goal

Johannesburg - The South African Reserve Bank (Sarb) has little policy room to boost demand in the economy and should keep its focus on taming inflation, deputy governor Lesetja Kganyago said on Tuesday.

Likely interest rate increases in the United States would require corresponding policy shifts in South Africa, said Kganyago, who has emerged as the front runner to head the bank when governor Gill Marcus ends her five-year term on November 8.

The Sarb left interest rates unchanged at 5.75% at a policy meeting this month but faces a dilemma as inflation has persisted above a 3-6% target band while economic growth has slowed and the bank cut its growth forecasts for the three years to 2016.

"Confidence in the economy is currently weak, and all else equal, will tend to put upward pressure on inflation rates as households and firms seek (wage and) price increases as a way to improve their finances," Kganyago said in a speech at an investment summit.

"Today, there is little policy space left to boost demand."

The economy needed to be more competitive, partly by ensuring that inflation did not price local goods and services "out of world markets", Kganyago said.

In a sign that exporters are still struggling after a global recession hit the economy five years ago, South Africa's trade deficit more than doubled to R16.3bn ($1.4bn) in August, the widest in seven months, data from the revenue service showed on Tuesday.

The shortfall, which partly reflects the lingering impact of prolonged strikes for higher wages in the platinum and auto sectors, points to a widening current account gap and pushed the rand to 11.3490 against the dollar on Tuesday, its weakest since late January.

"The trade deficit is likely to remain structurally high over the medium term which suggests that a turnaround in the currency's fortunes seems unlikely anytime soon," said Jeffrey Schultz, an economist at BNP Paribas Cadiz Securities.

The rand has fallen more than 7% against the dollar this year, and Kganyago said rising global interest rates would put downward pressure on the currency and push up local rates.

The reserve bank has already lifted its benchmark rate by 75 basis points this year to combat inflation, and some analysts expect one more increase at the last policy-setting meeting of 2014 in November.

"Monetary policy must retain and strengthen its focus on inflation," Kganyago said.

"In doing so, we will push the envelope of transparency and clarity wherever possible; to help ensure that inflation expectations do not drift from the target."