The risk that South African inflation will overshoot the six per cent upper limit of the Reserve Bank’s target should not be underestimated given the volatile global environment, Deputy Governor Daniel Mminele said.
An extended and sizable deviation in price growth from 4.5 per cent “would raise the risks of medium-term inflation expectations drifting back to, if not above, the top end of the range,” Mminele said in a copy of a speech posted on the central bank’s website.
The Reserve Bank said last month inflation will peak at 5.9 per cent in the second quarter of next year and settle at 5.4 per cent toward the end of 2020. While this is inside the institution’s target band, the Monetary Policy Committee has made it clear it prefer price growth close to 4.5 per cent rather than just below six per cent.
The MPC kept its benchmark rate unchanged at 6.5 per cent last month, with three of its seven members favoring a tighter stance. Its next policy announcement is scheduled for 22 November and forward-rate agreements starting in two months are pricing in a 60 per cent chance of a quarter-point increase.
“Exchange-rate depreciation as well as the rising trend in world oil prices and uncertainties about future electricity tariff increases pose the main upside risks to the outlook,” Mminele said. While sub-par growth in demand seem to limit the pass-through to prices of higher input costs for now, the central bank “will act against any sign of second-round price effects from the recent rand exchange-rate and oil-price shifts,” he said.
The rand has depreciated 14 per cent this year against the dollar, the most among major currencies tracked by Bloomberg after Brazil’s real, which has lost 16 per cent.