Share

Rates may need to rise on CPI risks, says SARB deputy governor

South Africa’s monetary policy stance remains accommodative and interest rates will need to increase to keep inflation within the target band if the central bank’s current forecasts play out, Reserve Bank Deputy Governor Francois Groepe said.

While the economy is relatively weak, the factors keeping growth below potential are primarily structural and lower rates wouldn’t offer much stimulus, he said in a speech posted on the central bank’s website on Friday.

A weaker currency and higher oil prices have compounded a dilemma for South African policy makers as they try to balance containing inflation that’s projected to accelerate toward the top end of its target range of 3% to 6%, and domestic demand that remains benign after the economy fell into a recession this year. Economic growth is seen slowing to 0.7% in 2017.

“We do not want to unduly constrain an already weak economy, but we must also ensure that the average South African’s purchasing power remains intact,” Groepe said. “The repo rate may rise gradually over the medium term, in a manner consistent with keeping inflation inside the target range.”

Rand Weakness

The central bank kept its benchmark rate at 6.5% last month after two quarter percentage point cuts since July 2017. The outlook for inflation deteriorated after the rand’s 14% drop against the dollar this year and three of the monetary policy committee’s then-seven members voted for a rate increase in September. Inflation measured 4.9% in August, below expectations but above the bank’s preferred target of the mid-point of the band.

The MPC’s forecast model shows five 25 basis-point rate increases may be needed before the end of 2020.

“The key point is this: if the inflation forecast plays out as expected, monetary policy tightening will be required to stop inflation, and potentially also inflation expectations, from moving outside of the SARB’s target range for an extended period of time,” Groepe said.

The likelihood of slightly higher nominal rates over the medium term should be seen in context of a current stance that remains accommodative, he said. “Had the economy not been so weak, the policy stance would in all likelihood have been different,” Groepe said.

Africa’s most-industrialized economy fell into recession in the second quarter after a slump in manufacturing and farming production.

The central bank expects economic growth to recover next year, although the difference between actual and potential output is only seen closing in the final quarter of 2020, Groepe said.

* Sign up to Fin24's top news in your inbox: SUBSCRIBE TO FIN24 NEWSLETTER

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.94
-0.0%
Rand - Pound
23.91
-0.0%
Rand - Euro
20.41
+0.1%
Rand - Aus dollar
12.33
+0.1%
Rand - Yen
0.13
-0.0%
Platinum
908.05
+1.2%
Palladium
1,014.94
+1.3%
Gold
2,232.75
-0.0%
Silver
24.95
-0.1%
Brent Crude
87.00
+1.8%
Top 40
68,346
0.0%
All Share
74,536
0.0%
Resource 10
57,251
0.0%
Industrial 25
103,936
0.0%
Financial 15
16,502
0.0%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders