South African inflation forecasts would need to improve substantially for policy makers to start cutting interest rates, the Reserve Bank said.
“Should conditions develop in line with the current forecasts, it may at some point become possible to conclude the policy tightening cycle,” the central bank said in its Monetary Policy Review released Monday in the capital, Pretoria. “However, the bar for loosening is high, requiring a substantial, sustained improvement in forecast inflation, bringing it more comfortably within the” 3 percent to 6 percent target range, it said.
The Monetary Policy Committee has raised the benchmark repurchase rate by two percentage points to 7 percent since January 2014 as it sought to control price growth. While inflation slowed to 5.9 percent in August, the first time this year the rate fell below 6 percent, the central bank said it will move above the upper end of the target range again from September until the three months through June next year and won’t subside below 5.4 percent in any quarter until the end of 2018.
“Inflation expectations remain uncomfortably close to the top of the target range and core inflation is at a seven-year high,” the Reserve Bank said. “This poses risks that future price shocks might cause more prolonged deviation from the inflation target range.”
The MPC left borrowing costs unchanged at its last three meetings to help support an economy forecast to expand at 0.4 percent this year, the slowest pace since a 2009 recession. In an environment of high debt, low investment and low confidence, monetary policy has limited capacity to boost growth, the central bank said. Achieving the government’s goal of 5 percent growth requires a broader reform agenda, the bank said.
“The economy is several years into a major structural slowdown,” the Reserve Bank said. Without structural reforms “the economy is expected to expand at rates between 1 and 2 percent for the foreseeable future, generating little or no improvement in employment or individual living standards,” it said.
The deficit on the current account, the broadest measure of trade in goods and services, narrowed to 3.1 percent of gross domestic product in the second quarter from a revised 5.3 percent in previous three months after the nation recorded its first quarterly trade surplus in a year. The shortfall, which was 4.3 percent of GDP last year, will stay between 4 percent and 5 percent of GDP in 2016 and 2017, the Reserve Bank said.
The rand strengthened 0.5 percent to 13.6525 per dollar by 5:48 p.m. in Johannesburg on Monday. The currency has gained 13 percent against the dollar in 2016 after weakening 25 percent last year.