South African Rates May Need to Rise on CPI Risks, Groepe Says

(Bloomberg) -- South Africa’s monetary policy stance remains accommodative and interest rates will need to increase to keep inflation within the target band if the central bank’s current forecasts play out, Reserve Bank Deputy Governor Francois Groepe said.

While the economy is relatively weak, the factors keeping growth below potential are primarily structural and lower rates wouldn’t offer much stimulus, he said in a speech posted on the central bank’s website on Friday.

A weaker currency and higher oil prices have compounded a dilemma for South African policy makers as they try to balance containing inflation that’s projected to accelerate toward the top end of its target range of 3 percent to 6 percent, and domestic demand that remains benign after the economy fell into a recession this year. Economic growth is seen slowing to 0.7 percent in 2017.

“We do not want to unduly constrain an already weak economy, but we must also ensure that the average South African’s purchasing power remains intact,” Groepe said. “The repo rate may rise gradually over the medium term, in a manner consistent with keeping inflation inside the target range.”

Rand Weakness

The central bank kept its benchmark rate at 6.5 percent last month after two quarter percentage point cuts since July 2017. The outlook for inflation deteriorated after the rand’s 14 percent drop against the dollar this year and three of the monetary policy committee’s then-seven members voted for a rate increase in September. Inflation measured 4.9 percent in August, below expectations but above the bank’s preferred target of the mid-point of the band.

The MPC’s forecast model shows five 25 basis-point rate increases may be needed before the end of 2020.

“The key point is this: if the inflation forecast plays out as expected, monetary policy tightening will be required to stop inflation, and potentially also inflation expectations, from moving outside of the SARB’s target range for an extended period of time,” Groepe said.

The likelihood of slightly higher nominal rates over the medium term should be seen in context of a current stance that remains accommodative, he said. “Had the economy not been so weak, the policy stance would in all likelihood have been different,” Groepe said.

Africa’s most-industrialized economy fell into recession in the second quarter after a slump in manufacturing and farming production.

The central bank expects economic growth to recover next year, although the difference between actual and potential output is only seen closing in the final quarter of 2020, Groepe said.

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