S. Africa Central Bank Seeks Better CPI Outlook to Cut Rates

  • Projected inflation close to target-band’s upper end: Kganyago
  • Monetary policy has limited capacity to boost growth

South African inflation forecasts would need to improve substantially for policy makers to start cutting interest rates, the central bank said.

“Should conditions develop in line with the current forecasts, it may at some point become possible to conclude the policy tightening cycle,” the bank said in its Monetary Policy Review released Monday in the capital, Pretoria. “However, the bar for loosening is high, requiring a substantial, sustained improvement in forecast inflation, bringing it more comfortably within the” 3 percent to 6 percent target range, it said.

The Monetary Policy Committee has raised the benchmark repurchase rate by two percentage points to 7 percent since January 2014 as it sought to control price growth. While inflation slowed to 5.9 percent in August, the first time this year the rate fell below 6 percent, the central bank said it will move above the upper end of the target range again from September until the three months through June next year and won’t subside below 5.4 percent in any quarter until the end of 2018.

“Although we get back into the target, projected inflation remains bubbling toward the upper end of the inflation target,” Reserve Bank Governor Lesetja Kganyago said in Pretoria after the release of the report. “We would like to see that inflation is comfortably within that target range, that is the higher bar that we speak of.”

The five-year breakeven rate, which measures investors’ expectations for consumer-price growth, has fallen 50 basis points since the start of September to 6.16 percent. While the rate has come down, it remains high and outside the inflation target, Chris Loewald, deputy head of research at the Reserve Bank, said.

The MPC left borrowing costs unchanged at its last three meetings to help support an economy forecast to expand at 0.4 percent this year, the slowest pace since a 2009 recession. The pause in the tightening cycle should provide time for some of the uncertainties around the inflation forecast to be resolved, the central bank said in Monday’s report.

Achieving the government’s goal of 5 percent economic growth requires a broader reform agenda, the central bank said. In an environment of high debt, low investment and low confidence, monetary policy has limited capacity to boost growth, it said.

‘Structural Slowdown’

“The economy is several years into a major structural slowdown,” the Reserve Bank said. Without structural reforms “the economy is expected to expand at rates between 1 and 2 percent for the foreseeable future, generating little or no improvement in employment or individual living standards,” it said.

The deficit on the current account, the broadest measure of trade in goods and services, narrowed to 3.1 percent of gross domestic product in the second quarter from a revised 5.3 percent in previous three months after the nation recorded its first quarterly trade surplus in a year. The shortfall, which was 4.3 percent of GDP last year, will stay between 4 percent and 5 percent of GDP in 2016 and 2017, the Reserve Bank said.

The rand weakened 0.2 percent to 13.6288 per dollar by 8:15 a.m. in Johannesburg on Tuesday. Yields on rand-denominated government bonds due December 2026 fell one basis point to 8.57 percent. The currency has gained 14 percent against the dollar in 2016 after weakening 25 percent last year.

“The rand is exposed to both domestic and foreign risks,” including further U.S. interest-rate increases and possible cuts in South Africa’s credit rating, the Reserve Bank said in the report. While there may be scope for some currency appreciation “in the short and medium run, however, there are risks the currency could resume its depreciation trend,” the central bank said.

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