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Reserve Bank says too early to claim inflation win

Expects to see price growth stabilising at 4.5% only by the end of 2021.

The Reserve Bank says it’s premature to claim victory in the war against inflation and sees price growth stabilising at 4.5% only by the end of 2021.

While inflation has been inside the central bank’s target band of 3% to 6% for two years and was at the midpoint of this range in March, it’s “too early to claim that inflation is already permanently lower,” the South African Reserve Bank said in its Monetary Policy Review published Wednesday in the capital, Pretoria. The improved outcomes were mainly due to positive surprises such as low food-price growth and a stable exchange rate, the central bank said.

Read: Sarb says inflation risks balanced as holds rate

These comments could further knock the chances of lower borrowing costs this year. The bank tightened policy in November even as the economy was coming out of a recession and kept its key rate last month and in January.

The central bank’s quarterly projection model has the repurchase rate moving to 7% by the end of 2021 and sees the current rate of 6.75% as “slightly expansionary,” according to the review. If the growth-inflation trade-off deteriorates, policymakers may prefer to avoid a tight stance, in which case inflation will not stabilize at 4.5% by 2021, the central bank said.

The last time any member of the Monetary Policy Committee voted to lower interest rates was in March 2018 and the central bank has been steadfast in saying it wants to see inflation expectations anchored at 4.5%.

“The South African Reserve Bank is not comfortable with expectations close to 6%,” it said in the review. Price growth of about 4.5% will help by bringing the domestic inflation rate closer to that of South Africa’s trading partners and boost competitiveness, the central bank said.

© 2019 Bloomberg L.P

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