South African price pressures are spreading in the economy because of a weaker rand, leaving little room for the central bank to cut interest rates, Deputy Governor Daniel Mminele said.
“The scope for reducing interest rates further is limited and it will be a function of how the data comes in,” Mminele said in an interview with Bloomberg TV in Moscow on July 20. “What we’re seeing now is some second-round effects, some lagged effects, of the currency” weakness.
The Reserve Bank left its benchmark repurchase rate at 5 percent for a sixth meeting last week, with the rand’s 14 percent slump against the dollar this year making it difficult for policy makers to spur economic growth. The Monetary Policy Committee lowered its growth forecast for this year to 2 percent from 2.4 percent as mining strikes and a recession in Europe curb exports.
The “economy is quite weak, performing way below its potential, which potentially suggests it may need more support,” he said. “But inflation risks are building.”
While inflation slowed for the first time in four months to 5.6 percent in May, that’s likely to be temporary, Mminele said. The central bank expects inflation to average 5.9 percent this year, up from a previous estimate of 5.8 percent, and to exceed the bank’s target in the third quarter, when it will average 6.3 percent.
Price pressures remain strong because of rising wage demands and higher food costs, Mminele said in the interview in the Russian capital, where he was attending the Group of 20 finance ministers’ meeting. He also downplayed the rand’s 3.5 percent rebound against the dollar since June 20 as investors reduced expectations of how fast the U.S. Federal Reserve will scale back its stimulus.
The rand gained 0.7 percent to 9.8043 to the dollar at 4:47 p.m. in Johannesburg.
Faster inflation doesn’t mean the bank will necessarily raise rates either, Mminele said.
“It’s not a matter of moving in lockstep with what other countries are doing,” he said in response to a question about whether the bank could follow Indonesia and Brazil -- two other emerging markets struggling with a combination of slow growth and fast inflation -- and raise interest rates.