South Africa’s monetary policy may stay accommodative, but inflation needs careful monitoring - IMF

By bne IntelliNews December 11, 2014

South Africa’s annual CPI inflation is likely to ease to 5.7% in December from 5.8% last month and the recent drop in oil prices will probably help it slow further next year, but risks to the inflation outlook remain and the central bank must stay vigilant, the International Monetary Fund (IMF) said in a statement after concluding an Article IV consultation with the authorities.

“While recent declines in oil prices and the planned fiscal consolidation could allow the SARB to remain accommodative for some time, risks to the inflation outlook need continued careful monitoring,” the fund said, adding that effective communication to help guide inflation expectations is important.

It forecasts South Africa’s end-year inflation at 5.5% next year, while the average annual inflation is anticipated to ease to 5.2% from 6.1% this year. SARB (the South African Reserve Bank) has a slightly higher forecast for the 2015 average inflation – 5.3%.

At its latest policy meeting last month, SARB noted that despite the lower trajectory of headline inflation, underlying inflation pressures persist, given the elevated level of core inflation. Core inflation, which was 5.8% in November, is anticipated to average 5.6% and 5.7% in 2014 and 2015 respectively, with a peak of 5.9% in Q1 2015.

Although SARB is of the view that rates will have to be increased further over time, it has to find a balance with the subdued domestic economic growth, which remains well below potential and is not enough to boost employment and reduce poverty and inequality. The growth of Africa’s most developed economy is widely expected to slow to 1.4% this year, pressured by protracted strikes and electricity supply constraints, as well as by the slowdown in major trading partners.

The IMF predicts that improved industrial relations (strike issues) would boost growth to 2.1% in 2015, but private consumption will remain depressed under tighter financial conditions. Later on, slowly easing infrastructure constraints and stronger external demand could raise growth to 2.75% in 2016–19, still well below the desired 5% by the government.

At the same time, the IMF warned of major downside risks to growth, including lower global growth and commodity prices, further delays in relieving electricity constraints, and more labour market disruptions. In addition, a sharp surge in global financial market volatility could lead to capital flow reversals and trigger a disorderly adjustment in the current account deficit, which remains high at 6.0% of GDP in Q3.

The IMF noted also that exchange rate flexibility and the favourable currency composition of external debt seem to be effective buffers against volatile capital flows. It recommended that authorities should explore options to build reserves in order to boost resilience. South Africa’s net forex reserves have been declining for five consecutive months, reaching $42.9bn as of end-November. Its gross gold and foreign exchange reserves stood at $48.5bn at the end of last month.

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