South African Monetary Policy Unchanged in July

The Monetary Policy Committee of the South African Reserve Bank decided on July 18th to leave the main interest rate unchanged at 5.0 percent, citing conflicting policy choices relating to rising inflation and slowing growth.
Joana Taborda | 7/18/2013 2:41:59 PM
Excerpt from the statement by the South African Reserve Bank:

The Monetary Policy Committee continues to face conflicting policy choices relating to rising inflation and slowing growth. Inflation is expected to resume its upward trajectory following the brief respite in May. However, despite the upward trend in core inflation, there are no strong signs of excess demand pressures and the forecast for headline inflation suggests that the breach of the target may be short-lived.

The main upside risk to the inflation outlook is the exchange rate and much will depend on the strength of the pass-through to inflation, which to date has been relatively muted. However, the risk remains that these pressures could be mounting, particularly if further currency weakness occurs and affects inflation expectations, which are currently anchored at the upper end of the target range. In addition, the outcome of the present round of wage bargaining will be critical in determining the extent of wage pressure on the inflation outlook.

The output gap has widened, and is only anticipated to begin to narrow during 2015, when growth is expected to be more or less in line with potential. The downside risk to growth has already resulted in the Bank being more tolerant of inflation at the upper end of the target range than would normally have been the case, an approach that is consistent with a flexible inflation targeting framework. 

While the upside risks to the inflation outlook reduce the scope for further accommodation, a tightening of the monetary policy stance does not automatically follow. This will be highly dependent on the inflation trajectory unfolding in this very uncertain environment. In other words, it has become even more data dependent. At this stage a sustained breach of the inflation target is not the central forecast. However, concerns arise about the revised higher trajectory of core inflation and macroeconomic vulnerabilities that are increasingly evident.

The Monetary Policy Committee is mindful of these conflicting pressures and the challenging domestic and global environment, and will continue to monitor developments closely and act appropriately to achieve its mandate.

The Monetary Policy Committee has decided to keep the repurchase rate unchanged at 5.0 percent.

South African Monetary Policy Unchanged in July