POLICY SETTING COMPLEX
Daniel Mminele highlights global and local factors
THE OPERATING environment for South Africa’s monetary policy has become increasingly complex, with growth and inflation dynamics being influenced by a range of global and domestic factors, which call for delicate trade-offs in terms of policy settings.
This is according to Reserve Bank deputy governor Daniel Mminele who on Friday said market participants and policymakers now had to grapple with the possibility or risk that the lift-off of rates in the US might occur sooner than they anticipated, while in Japan and the euro zone more easing seemed to be on the way, while risks assigned to geopolitical matters, which the market seemed relatively relaxed about, might intensify.
“All these factors are likely to increase volatility. Recent experience has shown us how sensitive our domestic markets are to the international backdrop. Against the background of South Africa’s elevated current account deficit, which is expected to only correct slowly, the risk of abrupt swings in capital flows cannot be underestimated,” he said.
He was speaking at the Bank of America Merryl Lynch’s fixed income conference. He said South Africa benefited from the massive liquidity injection into the global financial markets following the recession.
Inflows of capital meant the current account deficit was comfortably financed, while it also resulted in significant appreciation of the rand.
This in turn, said Mminele, helped to contain inflation, allowing room for accommodative monetary policy over a fairly extended period.
“However, these trends started to reverse in May 2013 in anticipation of US monetary policy normalisation, following indications to that effect from the Fed. This saw a widespread depreciation of emerg- ing market currencies, which intensified with the actual implementation of the US Federal Reserve’s asset purchase tapering programme started from January 2014.”
Mminele said the rand
Inflows of capital meant the current account deficit was comfortably financed.
depreciated quite sharply in line with emerging market currencies, with the weakness exacerbated by a widening current account deficit.
The rand weakness contributed to rising inflationary pressures, with inflation breaching the 6 percent target in April and reaching 6.6 percent in May and June, before retreating to 5.9 percent in September and October.
“The moderation in food and petrol prices contributed to lower inflation outcomes in recent months. In particular, the abrupt and significant decline in international oil prices to below $80 (R885) per barrel in November has had a positive impact on the medium-term inflation outlook.”
But Mminele said there was a lot of uncertainty around the sustainabilty of the decline in oil prices, while the exchange rate also continued to pose upside risks to the inflation outlook, as it still remained vulnerable to changing perceptions about global monetary policy normalisation, and the large current account deficit.
“As we have indicated previously, wage settlements that are delinked from inflation and underlying productivity trends also pose an upside risk to the inflation outlook. Furthermore, the [Reserve] bank remains concerned about the elevated level of core inflation, which remains close to the upper target level,” he said.