South Africa has little space for monetary policy to support expansion
South Africa has limited space for counter-cyclical monetary policy to support economic expansion because inflation risks have increased, central bank Governor Lesetja Kganyago said.
The balance of risks for growth in consumer prices is “on the upside,” with the rand weakening against the dollar, a higher oil price, and a chance that power prices will increase, he said in an interview Friday in New York with Bloomberg TV.
The Monetary Policy Committee unexpectedly cut its key interest rate in July after the economy fell into a recession. In September, it held the rate even though inflation was within the target band of 3 percent to 6 percent. Uncertainty over policies in the lead-up to the ruling party’s elective conference next month put a damper on growth, with business and consumer confidence dropping.
“The issues of growth in South Africa have got to do with its own idiosyncrasies,” Kganyago said. The country will have “more policy certainty” after the African National Congress’s leadership vote, he said.
South Africa has more monetary policy flexibility than it did three years ago, Kganyago said.
Inflation is has been inside the target band since March, reaching 4.6 percent in July and 5.1 percent in September, while the current-account deficit has narrowed to 2.4 percent of gross domestic product from as much as 6.7 percent in 2013.
The rand has weakened 4.5 percent against the dollar this year, making it the worst performer in the period among 16 major currencies tracked by Bloomberg.
Kganyago said in a speech on Thursday in New York that the central bank has to consider South Africa’s challenging economic environment when setting policy.
“We have to take cognizance of the growth outlook and provide whatever support we can,” Kganyago said in a written copy of the speech. “We therefore aim for a policy stance that balances short-term growth support with long-term disinflation, and all its accompanying benefits.”
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