Kganyago says inflation 'won't be a problem'
...as bank cuts rates for fifth time this year
JOHANNESBURG
- Reserve Bank Governor Lesetja Kganyago has said that inflation is expected to remain contained over the next two years, despite concerns from some economists that South Africa is heading toward a deflation "danger zone."
The governor was speaking during a briefing following the repo rate announcement. The Monetary Policy Committee decided to cut rates by 25 basis points, in line with market expectations.
This brings the repo to 3.5 percent, the lowest rate since the repo system was introduced in 1998. The central bank has slashed interest rates by 300 bps so far this year.
Some economists however feel the MPC could have introduced deeper cuts, given the unprecedented economic crisis brought on by the Covid-19 pandemic.
Taking into account the collapse in growth and weak inflation, there is "scope" for deeper cuts, said Old Mutual Chief Economist Johann Els.
He previously told Fin24 that the bank should be responding to the risk of deflation.
"Under these circumstances one needs to frontload [rate cuts] as much as possible," he said during a phone call just after the rates announcement.
Kganyago however noted that South Africa is experiencing disinflation – which means inflation is growing at a slower place than the previous period and not deflation, when prices decline. Currently the SA bond market has not priced for deflation and it is also not the base case for the bank, he said.
"Deflation means prices have turned negative and that is not what we are experiencing in the SA economic space at the moment," he said.
"Inflation is well contained. Over the next two years; 2021 and 2022, we do not see inflation as a problem. It is within target and it is closer to the midpoint of our inflation target range."
in 2020, and 4.3 percent in 2021 and 2022.
Old Mutual's forecasts headline inflation to be below three percent until March 2021. Els said that even if SA is currently experiencing disinflation, the inflation rate is below three percent and could be below the targeted 4.5 percent for a longer period. "That is risky territory," said Els.
Inflation is well contained. Over the next two years; 2021 and 2022, we do not see inflation as a problem. It is within target and it is closer to the midpoint of our inflation target range.