IMF urges Reserve Bank to act against rising inflation

The International Monetary Fund has urged the SA Reserve Bank to keep inflation at its mid-point target goal of 4.5% to preserve price stability and central bank credibility.

The central bank's monetary policy committee began its final meeting for 2018 on Tuesday. It has previously said it wants to keep price growth mid-point between the target band of 3%-6%. The SARB will announce its repo rate decision at 15:00 on Thursday. 

The repo rate is the benchmark interest rate at which the Reserve Bank lends money to other banks. Changes in the repo rate affect the prime lending rate, which is the lowest rate at which banks start lending to clients. 

In its concluding statement on Monday following a staff visit to South Africa, the IMF said that monetary policy is not an effective tool to “address structurally low economic activity”. As inflation rises, the “accommodative monetary policy stance is running out of space”.

The Consumer Price Index, or CPI, came in at 4.9% in September. The October reading, which will be released on Wednesday, is expected to be higher due to rising fuel prices.

In a poll conducted by Reuters last week, 16 out of 26 economists said the central bank would keep the repo rate steady at 6.5%. The rest predicted a 25 basis point hike. 

Enhance agricultural productivity

The IMF said land reform in South Africa should be guided by international experience and should focus on enhancing agricultural productivity. 

“Potential negative effects of land reform should be mitigated, particularly those related to the security of property rights and the health of bank balance sheets,” the IMF’s staff concluding statement read. 

Parliament's Joint Constitutional Review Committee last week voted to adopt a report which recommends a change to section 25 of the Constitution, to make expropriation without compensation more explicit.

This still need to be processed by both houses of Parliament. The matter is only likely to be finalised after the May 2019 elections

The IMF also recommended that the ANC’s resolution to nationalise the SARB should be reconsidered, saying it represents an “unnecessary distraction” and will burden the fiscus with buying out the private shareholders.

The fund cautioned that some of the initial optimism, following the appointment of President Cyril Ramaphosa in February, has dissipated as growth remains weak and reform implementation has been slow. 

South Africa slumped into a technical recession following two consecutive quarters of negative economic growth. 

Following Treasury’s downwards reversion of SA's 2018 GDP growth to 0.7% in October, the IMF expects public debt and state guarantees for SOEs to continue rising, given the fragile financial position of several parastatals, including power utility Eskom.

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