May 31 (Bloomberg) -- South Africa’s new central-bank mandate brings “difficult challenges” as policy makers aim to support economic growth while maintaining price stability, Governor Gill Marcus said.
The Reserve Bank’s actions are “consistent with the flexible inflation-targeting framework,” Marcus said in a speech in Johannesburg yesterday.
Marcus has kept the benchmark lending rate unchanged at 5.5 percent for a record 18 months to support the economy’s recovery, even as higher oil prices and a weaker rand keep inflation above the upper limit of the 3 percent to 6 percent target range. In February, the government cut its economic growth forecast for this year to 2.7 percent from 3.4 percent.
“There is an upside risk to inflation, primarily because of a weakening exchange rate and there is a downside risk to growth particularly because of all the things that are happening in Europe,” Marcus said. “Therefore we remain ready to move in either direction, should the need arise.”
Europe buys about a third of South Africa’s manufactured goods and the central bank is monitoring for “contagion” effects from the debt crisis in that region, the governor said. The scale of the global economic crisis is “huge,” she said.
“Behind the scenes, I believe they remain more concerned about what’s going on in Europe than inflation,” Peter Attard Montalto, an economist at Nomura Plc in London, said by e-mail yesterday. Another financial market shock “would be enough to publicly admit the balance was tipping and so cut rates.”
The rand has slumped 10 percent against the dollar since April 2 as investors sold riskier, emerging-market assets. The currency was at 8.5290 per dollar as of 8:58 a.m. in Johannesburg today.
The central bank will continue to buy foreign currency to add to reserves, though it won’t try to influence the level of the rand, Marcus said. Building reserves is a “challenge,” she said.
Growth in unsecured lending in South Africa is cause for concern, while the bank is also worried about rising debt levels among consumers, the governor said.
“There is a potential concern about the possibility of an excessive burden of household debt,” Marcus said. “There is the risk that some households are becoming over-leveraged.”
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