Rates may rise to keep inflation within target band – Sarb deputy

South Africa’s monetary policy stance remains accommodative and interest rates will need to increase to keep inflation within the target band if the central bank’s current forecasts play out, said SA Reserve Bank (Sarb) deputy governor Francois Groepe.

Although the economy was relatively weak, the factors keeping growth below potential were primarily structural and lower rates would not offer much stimulus, he said yesterday.

A weaker currency and higher oil prices have compounded a dilemma for policymakers as they try to balance containing inflation that is projected to accelerate toward the top end of its target range of 3% to 6%, and domestic demand that remains benign after the economy fell into a recession this year.

Economic growth is seen slowing to 0.7% in 2019.

“We do not want to unduly constrain an already weak economy, but we must also ensure that the average South African’s purchasing power remains intact,” Groepe said. “The repo rate may rise gradually over the medium term, in a manner consistent with keeping inflation inside the target range.”

Rand weakness

Sarb kept its benchmark rate at 6.5% last month after two quarter percentage point cuts since July 2017.

The outlook for inflation deteriorated after the rand’s 14% drop against the US dollar this year and three of the monetary policy committee’s then seven members voted for a rate increase last month.

Inflation measured 4.9% in August, below expectations but above the bank’s preferred target of the mid-point of the band.

The Sarb monetary policy committee’s forecast model shows five 25 basis-point rate increases may be needed before the end of 2020.

“The key point is this: if the inflation forecast plays out as expected, monetary policy tightening will be required to stop inflation and, potentially, also inflation expectations, from moving outside of the Sarb’s target range for an extended period,” Groepe said. –