Bloomberg News

South Africa Inflation Risks on Upside, Recovery Hesitant

November 23, 2011

(Updates with comment from central bank governor in second paragraph.)

Nov. 22 (Bloomberg) -- The risks to South Africa’s inflation outlook are “skewed slightly” to the upside due to a weaker rand, while the domestic economic recovery remains “hesitant,” the central bank said.

“Domestic-demand pressures on inflation are restrained at this point in time,” the Reserve Bank said in its twice-yearly Monetary Policy Review released in Pretoria today. Low domestic demand will probably last for more than two years, Gill Marcus, the bank’s governor, said in a presentation.

The bank’s Monetary Policy Committee has kept the repurchase rate at a 30-year low of 5.5 percent for a year to support the recovery in Africa’s largest economy, even as price pressures increase. The bank forecasts inflation will remain above its 3 percent to 6 percent target range from this quarter until the fourth quarter of next year.

Rising energy costs and a weaker currency are upside risks for inflation, offsetting the effect on prices from lower growth in Europe as a result of a debt crisis, the central bank said.

The inflation rate is forecast to peak at an average of 6.3 percent in the first quarter of 2012 if the key interest rate remains unchanged, according to the bank. “In the current climate we need to watch what’s happening rather than respond to” the breach of the inflation target, Marcus said.

Worst Performer

Crude oil climbed 6.9 percent in New York this year and traded as high as $98.49 per barrel. Eskom Holdings SOC Ltd., which provides 95 percent of the nation’s power, raised electricity tariffs by an average 25 percent last year and 31 percent in 2009.

The rand is the worst performer this year of 16 major currencies tracked by Bloomberg, falling 21 percent versus the dollar and driving up the cost of imported goods. The currency traded as low as 8.4627 in Johannesburg today.

The debt crisis in Europe poses the greatest threat to the South African economy and the MPC “is aware of the dangers of a disorderly resolution of the crisis,” the bank said. Policy makers are “ready to act appropriately” if needed, it said.

The central bank lowered its forecasts for economic growth in Africa’s biggest economy on Nov. 10 to 3 percent for 2011 and 3.2 percent for next year because of slower growth in Europe, which buys about a third of South Africa’s manufactured goods.

Statistics South Africa is scheduled to publish third- quarter gross domestic product data on Nov. 30. Growth eased to an annualized 1.3 percent in the second quarter, the slowest pace in almost two years.

--Editors: Gordon Bell, Emily Bowers

To contact the reporter on this story: Franz Wild in Johannesburg at fwild@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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