Marcus Says South Africa Has Limited Options on Rates

South African Reserve Bank Governor Gill Marcus said rising inflationary risks because of a weaker rand and a slowing economy are limiting policy makers’ room to adjust interest rates.

“We have limited room for maneuver,” Marcus said in a speech in Johannesburg today at a conference hosted by the Bureau for Economic Research. While inflation is close to the top of the 3 percent to 6 percent target band, “our tolerance of this uncomfortable position, however, is recognition of the weak state of the economy.”

The Reserve Bank has kept its benchmark interest rate at 5 percent since a reduction in July. Inflation is forecast by the bank to breach the target this year, while the economy grew at its slowest pace since a 2009 recession in the first quarter. The bank said on June 4 the unchanged interest rate is helping maintain “price stability and support the economic recovery.” Forward rate agreements dropped after Marcus’s comments, paring an earlier increase, as investors reduced bets on higher interest rates.

“There are significant upside risks to the inflation outlook coming from the exchange rate and possibly from wage settlements in excess of inflation and productivity increases,” Marcus said. “While monetary policy remains tolerant of inflation at the upper end of the target range or of temporary breaches, the increasingly risky outlook for inflation, and its possible impact on inflation expectations, does constrain further accommodation.”

Accommodative Stance

The rand’s 15 percent slump against the dollar this year, the worst of 16 major currencies tracked by Bloomberg, is adding to pressure on inflation, which at 5.9 percent was unchanged for a third month in April. The bank forecasts inflation will peak at an average of 6.1 percent in the third quarter.

Yields on forward-rate agreements starting in 12 months fell as much as 18 basis points to 5.83 percent during Marcus’s speech, according to data compiled by Bloomberg. Yields on the contracts, which forecast a rate cut as recently as May 28, jumped 48 basis points yesterday, the biggest one-day move since October 2008, to the highest in a year after Marcus expressed the central bank’s determination to keep inflation in check.

“The current stance of monetary policy is accommodative,” Marcus said today.

Rand ‘Overshooting’

The central bank estimates that a 10 percent depreciation in the rand results in a 2 percentage-point increase in the inflation rate, though its effect is delayed and depends on how prolonged the weakness is, Marcus said.

“To date, the pass-through from the exchange rate to inflation has been relatively constrained,” she said. “This is probably due to low growth and relative lack of pricing power in a number of sectors of the economy. Also, it could be that the recent sharp moves in the exchange rate are seen to be excessive and a sign of overshooting.”

The rand extended its gains after Marcus’ comments. It traded at 9.9263 per dollar at 12:51 p.m. in Johannesburg, up from 10.0073 late yesterday.

Marcus warned that South Africa has to finance its current-account deficit at a time when uncertainty over global capital flows is heightened and the nation faces a “real threat of further downgrades by credit rating companies.”

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