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Sarb remains flexible on policy stance – Kganyago

Aug 24 2016 13:49

Johannesburg - The headline inflation has settled near the upper end of the Reserve Bank's target band of between 3% and 6%, but the bank's policy stance would remain flexible, governor Lesetja Kganyago said on Wednesday.

Kganyago said that prices remained sensitive to currency shocks and sharp increases to food inflation, which together were fuelling high wage demands in a stalling economy struggling to create jobs.

"One of the things we need is for price and wage demands to abide by the inflation target, so that we achieve a lower inflation rate more consistently," Kganyago said in a speech at a labour law conference.

Headline inflation slowed more than expected on Wednesday, to 6% year-on-year in July, its lowest point in 2016, according to Statistics South Africa.

Economists said lower inflation could see the SA Reserve Bank (Sarb) cut lending rates after keeping them on hold at its last two policy meetings, although much hinged on currency.

The rand weakened about 4% since it emerged late on Tuesday that Finance Minister Pravin Gordhan had been summoned to appear before police over an investigation into a covert unit inside the revenue service.

"This will likely overshadow any other news, despite the temporary relief granted by a better-than-expected July inflation print," chief Africa economist at Standard Chartered Bank Razia Khan said, referring to the summonses.

Analysts at Capital Economics said they did not expect the lower inflation to last, and that political developments - such as the saga involving Gordhan - would add currency volatility that could stoke inflation as well as the country's already large current account deficit.

"We have pencilled in a 25 basis point hike in Q4, though the weakness of the South African economy makes the timing of this hike difficult to pin down," Capital Economics analyst John Ashbourne said in a note.

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