South African central bank Governor Gill Marcus said policy makers’ core mandate is to control inflation even as economic growth forecasts are set to be lowered because of mining strikes.
“If you have higher inflation, you’re going to have higher prices, and you’re going to have higher wage demands,” Marcus told economists and business executives in Pretoria, the capital, yesterday. “As far as we’re concerned the core mandate of the central bank is price stability.”
The Reserve Bank said in its Monetary Policy Review released yesterday it may lower its economic growth forecast again as mining strikes threaten production. On May 23, Marcus cut this year’s projection to 2.4 percent from 2.7 percent, while keeping the benchmark interest rate at 5 percent, the lowest in more than 30 years. The economy expanded an annualized 0.9 percent in the first quarter, the slowest pace since a 2009 recession.
“The risks to economic growth lie to the downside as a result of the potential for further job and output losses, particularly in the mining sector,” the central bank said in its report. “The risks to inflation remain persistently skewed to the upside.”
Economic growth has come under pressure this year because of weak demand for exports from Europe and as union rivalry and wage demands raise the risk of strikes in the mining industry. Wildcat strikes this year have disrupted output at mines owned by Lonmin Plc (LMI), Glencore Xstrata Plc and Impala Platinum Holdings Holdings Ltd.
The central bank’s monetary policy has “continued to provide stability through a period of both global and domestic uncertainty,” it said. “The unchanged repo rate at 5 percent per annum, and the modest negative real repo rate are expected to foster price stability and support the economic recovery.”
Business confidence has slumped as labor unrest worsened. The RMB/BER index dropped four points to 48 in the second quarter, Rand Merchant Bank said in an e-mail yesterday, while the South Africa Chamber of Commerce and Industry said its index fell to 90.4 last month, matching the lowest level in almost 10 years reached in March.
“With the latest data releases” the growth forecast “may need to be revised down at the next meeting” of the Monetary Policy Committee, the bank said.
The inflation rate was unchanged at 5.9 percent for a third month in April. The bank forecasts inflation to peak at an average of 6.1 percent in the third quarter, breaching the bank’s 3 percent to 6 percent target band.
Marcus yesterday dismissed suggestions to raise the target.
“Right now inflation expectations are reasonably anchored around the upper level of the band,” she said. “I wouldn’t look to changing it at this point in time.”
Inflation may be spurred by a weaker rand, which has declined 13 percent against the dollar this year, the worst performer of 16 major currencies monitored by Bloomberg after the Japanese yen.
“The current level of the exchange rate, if sustained, poses a significant upside risk to the inflation outlook,” the bank said. “The depreciation of the rand has already affected petrol prices and poses a risk in terms of second-round inflationary effects.”
The rand fell 0.6 percent to 9.8719 against the dollar at 9:03 a.m. in Johannesburg today. The currency also weakened 0.6 percent after the report was released yesterday.
The prospects for capital inflows in South Africa are “less certain” than in recent years, increasing the risks of funding the current-account deficit, the central bank said.
South Africa relies mainly on foreign investment in stocks and bonds to help finance the current-account gap, inflows that have fluctuated this year as investor sentiment deteriorated. The shortfall reached 6.5 percent of gross domestic product in the fourth quarter.
“A reduction in the pace of capital inflows to South Africa will affect the value of the currency and sustainability of the current-account deficit, with potentially serious policy implications,” the bank said.
The currency’s slump to below 10 to the dollar last week followed expectations that the U.S. will curb its policy of quantitative easing, Marcus said. Emerging-market policy makers are watching developments closely and currency moves tend to be “overdone,” she said.
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