No sign of lower inflation, says Sarb

THE SOUTH African Reserve Bank (Sarb) has said it expects inflation to remain at relatively high levels over the medium term, reinforcing the view that it was looking beyond the recent decreases in inflation.

The Sarb said it had kept its eyes on the longer-term inflation outlook, which was likely to remain in the upper portion of its target range of 3 to 6 percent, despite the Consumer Price Index slowing to 5.3 percent and 5.4 percent in April and May, respectively.

“At these levels, even quite small shocks can prompt target breaches. Furthermore, sustained inflation close to 6 percent makes South Africa something of an outlier in world perspective, and exposes South Africans to higher longer-term interest rates, as well as adverse redistributional effects.

“It would be preferable for inflation to moderate further and for inflation expectations to be anchored closer to the 4.5 percent midpoint of the target range,” the Sarb said in its annual report for the year to March 31.

Reserve Bank Governor Lesetja Kganyago said that, during the past financial year, monetary policy faced an increasingly difficult scenario of dealing with rising inflation amid slowing domestic economic growth. Kganyago said headline inflation was above the upper end of the 3 to 6 percent target range, at an average of 6.3 percent.

CPI peaked at 6.8 percent in December last year.

“In the early months of 2017, inflation moderated considerably to 5.3 percent in April. While our forecast suggests that inflation will remain within the target range for the rest of the forecast period ending 2019, the forecast averages for these years, at around 5.5 percent, are uncomfortably close to the upper end of the range.

Challenges

“With inflation expectations anchored at levels of around 6 percent, the monetary policy challenges are significant, particularly given that most of the pressures on inflation have emanated from the supply side and not driven by excess demand,” Kganyago said.

He said that although the bank’s Monetary Policy Committee (MPC) indicated in March that the tightening cycle might have ended, “a further improvement in the inflation outlook would be required before the policy rate could be cut. In line with its strategic objective, the committee will remain focused on ensuring that headline inflation remains comfortably within the target range on a sustained basis.”

The MPC has kept interest rates unchanged since the 25 basis point increase in the repo rate to 7 percent in March last year.

Meanwhile, for the year to March 31, the Sarb reported after-tax profit of R1.4 billion, down from R1.5bn in the same period last year.

The bank said the low interest rate environment continued to affect its financial results. Interest income increased by R4bn last year.

Operating costs increased by R200 million.

The bank’s total assets decreased by R68.6bn, largely because of a decline of R70.6bn in gold and foreign-exchange reserves. Total liabilities decreased by R69.7bn.

“The decrease in both total assets and total liabilities was mainly as a result of a stronger rand and a lower gold price,” the bank said.