THE Reserve Bank would have to act if inflation as well as its
outlook remained elevated, despite the persistent low-growth
environment, deputy governor Daniel Mminele said on Wednesday.
"The
monetary policy committee is sensitive to the possible negative effects
of policy tightening on cyclical growth, but will remain focused on the
mandate of maintaining price stability in the interest of ensuring
sustainable growth over the medium-term," he said.
His comments
come six days after fellow Bank deputy governor Francois Groepe raised
concern about high inflation expectations — a sign that inflation
expectations are likely to carry weight in future interest-rate
decisions.
The Bank’s committee raises interest rates to curb
inflation. Although a rate hike might arrest an upward inflation
trajectory, it also bears the prospect of slowing economic growth.
Consumer inflation has been slowing in recent months, but at 6.1% in May, it remains outside the 3%-6% target range.
Forecasts showed that inflation would probably not return within the target band until the second half of 2017, Mminele said.
The weak rand and high food prices have been the main drivers of inflation.
The Bureau for Economic Research’s inflation expectations remain outside the target band.
South
African Chamber of Commerce and Industry (Sacci) economist Richard
Downing said on Wednesday that the Bank’s committee would probably press
pause in its rate-hiking cycle at its meeting in two weeks’ time.
Downing
cited weak demand and low growth to back his outlook. He also said an
interest-rate hike could worsen demand and further raise businesses’
input costs.
But Downing did not rule out the prospect of a rate hike later in 2016 to counter a weak currency and high inflation.
Sacci’s business confidence index, released on Wednesday, ticked up to 95.1 in June.
This is an improvement from the 91.8 recorded in May, but the index remained lower than the 97.9 it reached in June 2015.
Capital
Economics Africa economist John Ashbourne said the slight easing of
pessimism in the business sector — coupled with better survey and output
data — supported views that the economy might have rebounded slightly
in the second quarter, narrowly escaping a technical recession.
The
Sacci index showed that confidence rose marginally on the back of
improved exports and an increase in approved building plans, which
outweighed concern about the effect of Britain leaving the EU, the
so-called Brexit.
Mminele and Downing expected Brexit to affect
SA’s economy mainly through the financial markets in the form of capital
outflows rather than through trade.
SA’s financial linkages to
the UK — such as the value of South African assets owned by British
corporates and investment funds amounting to 46.5% of the country’s GDP
at the end of 2014 — made it vulnerable, Mminele said.
The growth
outlook for the rest of 2016 remained a challenge, but two of the
factors that had constrained expansion — drought and electricity-supply
constraints — were expected to fade over the coming year, Mminele said.
SA
escaped credit ratings downgrades by Fitch, Moody’s Investors Service
and Standard & Poor’s in May and June. The next rating reviews are
due in five months’ time, and Mminele warned that "the risk of
downgrades … should not be underestimated" should the country fail to
implement "further improvements in the macroeconomic fundamentals".
The Bank, the Treasury and economists expect the economy to grow less than 1% in 2016.
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