• Monetary policy decisions will be made on the available data
  • Rand pass-through to inflation has been lower than anticipated

South Africa’s central bank’s interest rate tightening cycle doesn’t mean borrowing costs will be increased at every meeting of the Monetary Policy Committee, Reserve Bank Governor Lesetja Kganyago said.

“We accept that we are on a tightening cycle, but that does not mean that every meeting you will decide that you are hiking,” Kganyago told reporters late on Friday in the capital, Pretoria. “You have to watch the data all the time.”

Lesetja Kganyago
Lesetja Kganyago
Photographer: Dean Hutton/Bloomberg

The MPC kept the benchmark interest rate unchanged in September after raising by a full percentage points to 6 percent in three steps since January last year. While inflation of 4.6 percent in August was within the bank’s 3 percent to 6 percent target range, it’s forecast to exceed that goal in the first and fourth quarters of next year. The economy will probably expand by 1.6 percent compared with an estimated 1.5 percent this year, according to central bank forecasts.

“The data tells us we are facing a policy dilemma of rising inflation and low growth growth,” Kganyago said. “That makes the balancing act of the Monetary Policy Committee tricky.”

While the central bank has said the rand is the biggest risk to the inflation outlook, the pass-through of the weaker currency to price growth has been less than anticipated, according to Brian Kahn, a MPC member and adviser to Kganyago.

The rand reached a record low of 14.1599 per dollar on Sept. 29. It closed 0.3 percent weaker at 13.0851 on Friday, paring its decline for the year to 12 percent.

The Reserve Bank won’t intervene in the foreign-exchange market to determine the value of the rand, Kganyago said. The currency’s decline has served as a “shock absorber” for the economy, he said.

The U.S. Federal Reserve’s decision to delay its monetary-policy tightening until possibly next year has helped to underpin the rand. The Fed’s recent communication about policy has been clear and consistent after it gave mixed signals about rate normalization in 2013, Kganyago said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE