Marcus Downplays Chance of Pre-Emptive Rate Increase

South Africa’s central bank won’t necessarily raise interest rates to ward off rising inflationary pressures because economic growth remains weak, Governor Gill Marcus said.

“The downside risks to the growth outlook would suggest we should tolerate inflation at these levels,” Marcus said in a speech in Johannesburg today. While upside risks to the inflation outlook make interest-rate reductions more difficult they “do not automatically imply a tightening of the monetary policy stance. The downside risks to growth imply that we would not want to be unnecessarily preemptive.”

The Reserve Bank held the repurchase rate at 5 percent last month and cut its economic growth forecast for this year to 2.4 percent from 2.7 percent. A 16 percent decline in the value of the rand against the dollar in 2013, the most of 16 major currencies tracked by Bloomberg, risks pushing up consumer prices. Inflation measured 5.6 percent in May, according to the statistics agency.

Policymakers have little room to maneuver because inflation remains near the top of the bank’s 3 percent to 6 percent target range. At the same time, mining strikes are curbing output while demand from Europe for manufactured goods remains weak, curbing growth.

“We are seeing increasingly strong upside risks to the inflation outlook, primarily coming from exchange-rate developments,” Marcus said. While the pass-through effect of a weaker rand on inflation appears more muted than it was in the past, the impact isn’t easy to determine with confidence, she said.

Core Mandate

An unexpected narrowing of the deficit on the current account to 5.8 percent of gross domestic product in the first quarter from 6.5 percent has eased pressure on the rand, which has gained 3.2 percent against the dollar since reaching a four-year low on June 11. The currency strengthened 0.7 percent to 10.0371 per dollar by 3:46 p.m. in Johannesburg.

“Our core mandate remains price stability,” Marcus said. “Our current objective is to keep inflation within the range.”

Economic growth slowed to an annualized 0.9 percent in the first quarter, the slowest pace since a 2009 recession. The mining strikes shaved off about 0.5 percentage point from the economy last year and have cut about 0.3 percentage point this year, according to the National Treasury.

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