South Africa’s Reserve Bank plans moderate interest rate increases, with future actions more dependent than usual on the economic data published, Governor Lesetja Kganyago said.
“We do not have preconceived notions of what the policy rate should be moving by at every one of the meetings,” Kganyago said in a speech in Johannesburg on Tuesday. “The current tightening cycle that we’ve identified, it is going to be a very moderate one.”
The central bank raised its benchmark repurchase rate by a quarter of a percentage point to 6% on July 23 to fight rising prices even as the economy grew at the slowest pace last year since a 2009 recession. The bank is forecasting that inflation, which accelerated to 4.7% in June, will breach the 3% to 6% target band in the first half of next year.
“The risks to South Africa’s inflation are on the upside,” Kganyago said. “Inflation is uncomfortably close to upper end of the target range and inflation expectations are also at elevated levels.”
The rand fell to its weakest level in more than 13 1/2 years last week, increasing the risk of steeper price growth as the cost of imports climb. The currency slid 0.6% to 12.7276 per dollar at 1:05 pm in Johannesburg, taking its decline this year to 9.1%. Forward-rate agreements, used to speculate on borrowing costs, are pricing in 30 basis points of rate increases this year.
The prospect of a Federal Reserve rate increase has decreased demand for riskier emerging-market assets and contributed to the rand’s tumble.
While members of the monetary policy committee are concerned about the effect of policy normalisation in the US, it doesn’t simply follow global interest rates and its decisions are focused primarily on the domestic inflation outlook, Kganyago said in a copy of his speech published on the central bank’s website.
Power cuts by Eskom are hurting retailers and manufacturers in Africa’s most-industrialized economy, while falling global metal prices are hampering mining. The Reserve Bank forecasts economic growth of 2% this year and 2.1% in 2016.
Manufacturing production declined 0.4% in June from a year earlier, the third straight month of contraction, Statistics South Africa said on Tuesday.
Ignoring the risks of the second-round effects of higher prices “could entrench inflation expectations at higher levels and could require stronger action later, with consequences for output,” Kganyago said.
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