Kganyago Sees Prices as South Africa Currency-Action Trigger

(Bloomberg) -- South African policy makers will only respond to changes in the exchange rate if they cause inflation to accelerate, central bank Governor Lesetja Kganyago said.

“Our approach in South Africa has been and continues to be that we do not react to the first-round effect of depreciation or appreciation of the currency,” he said at a forum in Washington on Wednesday. “We will only act to the extent that we think the depreciation of the currency would lead to a rise in inflation.”

Kganyago spoke before semi-annual meetings of the International Monetary Fund and World Bank, where finance ministers and policy makers will gather to discuss potential threats to global economic expansion. He noted that rising interest rates in developed nations may prompt capital to flee emerging markets and cause their currencies to weaken. Currency depreciation can fuel inflation by raising the price of imports.

Africa’s most-industrialized economy has managed to reduce some of its key vulnerabilities such as the size of its current-account deficit as a share of the economy, he said. As a result, the bank has some “breathing space” should risks to the inflation outlook -- such as currency movements or a spike in oil prices -- come to fruition, he said.

South Africa’s inflation rate fell to a seven-year low last month, with prices gaining an annual 3.8 percent, well within the central bank’s target range of 3 percent to 6 percent. The rand has appreciated about 4 percent to the dollar so far this year. It weakened 0.3 percent to 11.9616 by 12:21 p.m. in Johannesburg.

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