South Africa’s central bank said the potential of price pressures spreading in Africa’s biggest economy is “contained” because of slower growth.
That contrasts with comments from Reserve Bank Governor Gill Marcus, who said in a March 15 speech that inflation was becoming “more generalized” as demand picks up.
“Core inflation has trended higher but remains relatively moderate, with the potential for more generalized price pressures contained,” the Reserve Bank said in its twice-yearly Monetary Policy Review released in Pretoria today. “Demand pressures are muted.”
The Monetary Policy Committee has kept the repurchase rate at 5.5 percent for 18 months to support the economy’s recovery, even as higher oil prices and a weaker rand keep inflation near the top of the 3 percent to 6 percent target range. The outlook for inflation has improved, giving the central bank room to leave borrowing costs at the lowest level in more than 30 years.
“Although headline CPI remains high and just outside the target band, the inflation outlook has improved in terms of both the projected peak and profile of returning sustainably to the target,” the bank said in its report.
Inflation probably peaked in the first quarter at an average of 6.1 percent and will probably ease to below 6 percent after the second quarter, the MPC said on May 24. In March, the MPC had forecast a 6.5 percent peak in inflation. Consumer prices rose 6.1 percent in April, compared with 6 percent in the previous month.
Slower economic growth is evidence of muted demand pressures in the economy, the central bank said. Growth slowed to an annualized 2.7 percent in the first quarter from 3.2 percent in the previous three months, the statistics office said today. The central bank expects the economy to grow 2.9 percent in 2012.
“The demand is not there” from Europe because of a worsening debt crisis in the region, the bank’s Chief Economist Monde Mnyande said in Pretoria today. “We are going to suffer the consequences.” The bank expects a “slow pace” of growth in the medium term, he said.
The Reserve Bank has limited options to stimulate economic growth, while the government has less fiscal room to offset a further slowdown in the global economy than when Europe went into recession in 2008, MPC member Brian Kahn said. The Treasury hopes to narrow the budget deficit to 3 percent of GDP in the year through March 2015 from 4.5 percent this year.
“Our mandate is to keep price stability,” Kahn said. “Stable prices provide a more predictable environment for economic growth to take place. That will ultimately benefit those who are out of work.”
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