South Africa to Review Policy Stance as Inflation Risks Climb

  • Rand weakness, drought adding to pressure on inflation
  • Reserve Bank to make next interest-rate decision on Jan. 28

South Africa’s central bank will need to assess whether its current monetary policy stance remains appropriate after risks to the inflation outlook escalated because of a weaker rand, Deputy Governor Daniel Mminele said.

“The opening weeks of 2016 suggest that the conduct of monetary policy in South Africa will be further complicated,” Mminele said in a speech published on the central bank’s website. The Reserve Bank will need to be prepared to “to take decisive action within our flexible inflation targeting framework if the key mandate of price and financial stability comes under threat,” he said.

After falling 25 percent against the dollar in 2015, the rand weakened a further 6 percent since the start of this year, the worst of 16 major currencies tracked by Bloomberg. That’s adding to pressure on inflation, which reached 4.8 percent in November and is forecast by the bank to exceed the 3 percent to 6 percent target band in 2016. Governor Lesetja Kganyago raised the benchmark repurchase rate twice last year to 6.25 percent.

“The currency remains a key source of risk for inflation in South Africa,” Mminele said. “Rand depreciation, electricity tariff increases, and the impact of the drought on food prices are expected to outweigh the impact of lower oil prices.”

Local and global factors that are contributing to the weaker rand -- such as slower growth in China, rising interest rates and lower commodity prices -- may persist into the coming year, Mminele said.

The Monetary Policy Committee will make its next rate decision on Jan. 28.

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