South Africa Reserve Bank Sees ‘Too Much Inflation’ for Rate Cut

  • Solution for growth can’t come from fiscal or monetary policy
  • Borrowing costs still supportive of economy, Kganyago says

South Africa has “too much inflation” to lower interest rates, even as the economy will probably not expand this year, according to Reserve Bank Governor Lesetja Kganyago.

The solution for economic growth “probably isn’t going to come from rising commodity prices or a big rebound in world growth which helps exports,” Kganyago said in a speech in Johannesburg on Wednesday. “It also cannot come from yet more fiscal or monetary stimulus.”

Africa’s most-industrialized economy contracted in the three months through March as the worst drought in more than a century, low commodity prices and weak demand from the nation’s main export destinations weighed on output. Gross domestic product will probably grow zero percent in 2016, according to the central bank, complicating the government’s task of reducing a 27 percent jobless rate.

While unemployment will probably increase, wages continue to rise, fueling underlying inflation, Kganyago said.

“If we want lower interest rates and we want them without going through a recession, then we have to lower inflation outcomes arising from administered price processes,” Kganyago said. “Simply reducing the inflationary impulse from price and wage setting, to something around the middle of the inflation target range, would help to create jobs economy-wide and ease constraints on policy.”

While inflation expectations, as measured by the five-year breakeven rate, surged to an almost five-week high on Wednesday as the rand weakened after news website Daily Maverick reported Finance Minister Pravin Gordhan may be arrested, the rate is still below where it was at the start of 2016. Price growth slowed to 6 percent in July, the lowest rate this year, according to the statistics agency.

Given the rand’s recent gains and the prospect of falling food prices, “we expect underlying inflation to remain reasonably well contained,” Kganyago said. When taking into account the effect of price growth, the interest rate “remains exceptionally supportive of economic activity,” he said.

The Monetary Policy Committee left its benchmark repurchase rate unchanged at 7 percent at its last two meetings after tightening borrowing costs by 125 basis points since July last year in a bid to steer price growth back into its 3 percent to 6 percent target band. Price growth will probably peak at 7.1 percent in the fourth quarter, the central bank said last month.

The rand weakened 0.4 percent to 14.0580 per dollar at 11:66 a.m. in Johannesburg, paring its gains since the start of the year to 10 percent. Yields on rand-denominated government bonds due December 2026 rose 38 basis points to 8.90 percent.

“We still see future SARB decisions as very much FX-dependent,” Razia Khan, head of Africa macro research at Standard Chartered Plc, said in an e-mailed note to clients. “Recent political developments in South Africa, with news that the Hawks may still be questioning Finance Minister Gordhan, has created much more uncertainty.”

— With assistance by Amogelang Mbatha

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