• Reserve Bank can't be complacent on rand's effect on inflation
  • Monetary policy can't be used to stem capital outflows

South Africa’s Reserve Bank will act to counter the effect of a weaker rand on inflation if it starts to see price pressures spreading more broadly in the economy, Governor Lesetja Kganyago said.

“With weak commodity prices and U.S. policy normalization coming closer, we can not be complacent about the exchange rate and its potential inflation consequences,” Kganyago said at a conference in Stellenbosch near Cape Town on Thursday. “Our response will not be a response to the Federal Reserve’s moves, our response will be to the second-round effects of the depreciation of the currency.”

South Africa’s central bank has so far taken a gradual approach in tightening monetary policy, raising the benchmark interest rate by a total of 1 percentage point to 6 percent in three adjustments since January last year. While inflation of 4.6 percent in September was within the bank’s 3 percent to 6 percent target range, it’s forecast to exceed that goal next year.

Forward rate agreements show that investors are pricing in the next 25 basis-point rate increase in March.

Kganyago said the Reserve Bank has shown due concern for the weak economy by taking a moderate approach in raising interest rates, with monetary policy still remaining “accommodative.”

The bank’s contribution to growth is to “get the inflation anchored within the target,” he told reporters. “That brings the balance. And in doing so, we do that in balanced and flexible manner.”

Africa’s second-largest economy contracted for the first time in more than a year in the three months through June as low global demand, falling metals prices and a shortage of electricity weigh on output. The bank is forecasting growth of 1.6 percent next year compared with an estimated 1.5 percent in 2015.

The rand weakened less than 0.1 percent to 13.5291 against the dollar as of 1:13 p.m. in Johannesburg on Thursday, taking its decline for the year to 15 percent.

While higher U.S. interest rates may fuel capital outflows from emerging markets such as South Africa, monetary policy can’t be used to prevent that, Kganyago said.

“You cannot use monetary policy to try and stem outflows, but rather to respond to what the outflows do to the exchange rate and what the exchange rate does to the price formation process,” he said.

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