by Anna AndrianovaRene Vollgraaff
South Africa’s central bank has little room to manoeuvre on borrowing costs in the face of accelerating inflation, Deputy Governor Daniel Mminele said.
There are “upside” pressures on inflation and “we have much reduced flexibility in that regard, but we are not on any pre-set course and we remain data dependent,” Mminele said in an interview in Moscow on Tuesday. “We are ready to act when we think that the situation warrants it.”
The Reserve Bank has kept its benchmark repurchase rate unchanged at 5.75 percent for a year as the economy recovers from the slowest growth since a 2009 recession. Inflation quickened to 4.6 percent in May from 4.5 percent in the previous month and will exceed 6 percent in the first quarter of next year, according to the central bank.
The main risk to inflation is coming from the currency, said Mminele. The prospect of rising electricity prices also poses a threat, he said.
“The exchange rate is probably the single most important risk factor” for inflation, Mminele said. “Exchange rate risks are rising from interest rates changes and normalization in advanced economies.”
The rand weakened 0.2 percent and traded at 12.4735 per dollar as of 7:43 a.m. in Johannesburg on Wednesday, bringing its decline since the start of the year to 7.2 percent.
While Eskom Holdings SOC Ltd. had its application rejected last month for a higher-than-planned tariff increase in 2015, the power utility may reapply to raise its prices, said Mminele.[pro_ad_display_adzone id=”70560″]
Africa’s most industrialized economy’s growth potential has eroded after several years of weak expansion, Reserve bank Governor Lesetja Kganyago said in an interview last month. Consumer confidence fell to a 14-year low in the second quarter and the economy is forecast to expand 2 percent this year compared with 1.5 percent in 2014.
“Nobody likes high interest rates, so it may well indeed affect consumer confidence, but what is important is of course that we look at the totality of the economy in terms of what might be required,” Mminele said.
The economic crisis in Greece could affect South Africa if investors begin to sense heightened risk in the equity, currency and bond markets, Mminele said.
“Markets have been relatively muted,” he said. “Clearly the biggest concern at the moment is around the risks that the Greek banking system is facing.”
South Africa’s Monetary Policy Committee is scheduled to announce its next decision on July 23.
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