The South African Reserve Bank (SARB) said that the upside risks to inflation raise its concerns and the bank may need to take action to curb it.  Earlier this month, the bank's monetary policy committee (MPC) left the benchmark repo rate unchanged at 5%.

The bank said in its November edition of the Monetary Policy Review that the primary challenge to price stability lies in the volatility of food and petrol prices, which is exacerbated by exchange rate movements. Higher inflation outcomes increased the inflation expectations, which remain uncomfortably close to the upper band of the target range, the bank said.

The main upside risk to the local inflation outlook is the rand depreciation and the stronger second-round effects from depreciation as well as sharp increases in unit labour costs would have significant negative effect on the inflation outlook.

The bank said that global conditions have affected key external variables and domestic economic outcomes and then changes in risk perceptions have reflected in reduced capital inflows and higher bond yields. The subdued employment growth and household credit demand have contributed to a loss of momentum in economic and lack of utilisation of production capacity.

The relative volatility of inflation rate affected mainly by external factors and negative economic output, the bank said it needs to balance between the risk of higher inflation and support for the domestic economic recovery.

South Africa’s headline inflation eased to 5.5% y/y in October, remaining within the upper end of the central bank’s 3%-6% target range. SARB slightly lowered its inflation forecast for 2013 to an average of 5.8% from 5.9% expected in September, and for 2014 to 5.7% from 5.8%, leaving unchanged the 2015 forecast at 5.4%.

The forecast for core inflation for 2013 remained unchanged at an average of 5.2%, but has deteriorated to 5.6% for 2014 and was unchanged for 2015 at 5.3%. The upward drift of the underlying inflation measure continues to be driven by the lagged effects of the depreciation of the rand exchange rate and the impact of higher unit labour costs.