South Africa’s Central Bank Can Adjust Policy Gradually

South Africa’s Reserve Bank said it has room to adjust monetary policy gradually, signaling it may keep interest rates unchanged for longer.

“We choose to adjust slowly so that we are not forced to adjust fast,” the central bank said in a report released today in the capital, Pretoria.

A 40 percent drop in global oil prices since June has eased price pressures, keeping inflation within the central bank’s 3 percent to 6 percent target since September. Policy makers kept the benchmark repurchase rate unchanged at 5.75 percent on Nov. 20 after 75 basis points of increases this year.

Monetary policy movements in South Africa take 18 months to 24 months to work their way through to the economy, Reserve Bank Governor Lesetja Kganyago said at the Monetary Policy Forum held in Pretoria after the report’s release.

“The tightening that took place in January and July still has some time to itself into the system before we could know what the impact actually is,” Kganyago said. “Those interest-rate increases that took place in January and July have been factored into our forecasts for inflation and growth.”

Dependent Factors

The bank is forecasting inflation will average 5.3 percent next year, down from a previous estimate of 5.7 percent. The slowdown in inflation gives it room to support an economy estimated to grow 1.4 percent this year, the slowest pace since a recession in 2009, after strikes and power outages curbed output.

Future interest-rate increases will depend on inflation expectations, wage demands and the global financial environment, the Reserve Bank said. The rand will probably remain volatile and may weaken further, it said.

The rand has lost 4.6 percent against the dollar since the start of the year and was trading 0.5 percent stronger at 11.0074 per dollar at 7:41 p.m. in Johannesburg.

South Africa’s economic performance was seriously damaged by strikes in 2014 and the investment case for the country would be weakened if longer and more violent strikes become the norm, the bank said.

“Large salary and wage increases, in excess of productivity gains and inflation, are also a threat to South Africa’s competitiveness,” the Reserve Bank said. “Such increases would potentially reverse real exchange-rate gains and prolong the current-account deficit, high inflation and weak growth.”

Trade unions representing civil servants are demanding a 15 percent raise for their members.

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