SA facing high inflation, low growth dilemma

Johannesburg - The South African Reserve Bank’s interest rate tightening cycle doesn’t mean borrowing costs will be increased at every meeting of the Monetary Policy Committee, Sarb governor Lesetja Kganyago said.

“We accept that we are on a tightening cycle, but that does not mean that every meeting you will decide that you are hiking,” Kganyago told reporters late on Friday in Pretoria. “You have to watch the data all the time.”

The MPC kept the benchmark interest rate unchanged in September after raising by a full percentage point to 6% in three steps since January last year. While inflation of 4.6% in August was within the bank’s 3% to 6% target range, it’s forecast to exceed that goal in the first and fourth quarters of next year. The economy will probably expand by 1.6% compared with an estimated 1.5% this year, according to central bank forecasts.

“The data tells us we are facing a policy dilemma of rising inflation and low growth,” Kganyago said. “That makes the balancing act of the Monetary Policy Committee tricky.”

While the central bank has said the rand is the biggest risk to the inflation outlook, the pass-through of the weaker currency to price growth has been less than anticipated, according to Brian Kahn, a MPC member and adviser to Kganyago.

The rand reached a record low of R14.1599/$ on September 29. It closed 0.3% weaker at R13.0851 on Friday, paring its decline for the year to 12%.

The Reserve Bank won’t intervene in the foreign-exchange market to determine the value of the rand, Kganyago said. The currency’s decline has served as a “shock absorber” for the economy, he said.

The US Federal Reserve’s decision to delay its monetary policy tightening until possibly next year has helped to underpin the rand. The Fed’s recent communication about policy has been clear and consistent after it gave mixed signals about rate normalisation in 2013, Kganyago said.

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