Nov 15, 2011
Monetary policy focus remains on hitting inflation target – MarcusBack
© Reuse this
The “challenging times of uncertainty and possible unthinkable consequences in the European environment”, made it difficult for South Africa to pre-empt its policies, she said at a Swiss Chamber of Southern Africa event in Johannesburg.
The Reserve Bank kept its repo rate at a 30-year low of 5.5% last week.
Marcus said that there was a risk of stagflation in the domestic economy, with inflation rising and domestic growth still sluggish.
It still appeared that inflation was being driven by cost-push factors, as illustrated by the benign core inflation outcomes. However, the interaction between higher headline inflation and inflation expectations of wage and price setters was critical, Marcus said.
“To date inflation expectations appeared to be anchored at around the upper level of the target range, but the longer inflation remained outside the target, particularly if it surprises on the upside, the more precarious these expectations become, and the greater the upside risk to the inflation outlook,” she explained.
The Reserve Bank, she said, saw medium-term inflation outside the target range at this point, and regarded the breach, although extended, to be temporary.
In addition, the weak state of the economy also impacts on the approach taken.
“But we have to be vigilant on both sides. There is always a possibility of upside surprises to growth or a dislocation of inflation expectations from the target range, which could take inflation well above the target range.
“However, on the other side, although our assumption for European growth has been lowered, it does not contain the worst case scenario of a meltdown in the eurozone, which would have severe implications for the global economy and South Africa. Although this is seen as a tail risk, it is not a remote possibility.”
Also, the volatility of the rand would be determined by bouts of risk aversion in global financial markets.
The general expectation, said the governor, was that the rand was unlikely to return to previous levels of below R7 to the dollar, but to appreciate somewhat from current levels.
But, she said that a weaker rand also comes with its advantages, making exports more competitive and imported goods more expensive - providing a boost to domestic producers.
“This is in effect an easing of monetary conditions for domestic producers. However, this advantage will be short-lived if offset by higher wage and other input costs which offset the advantage faced by producers.”
But Marcus pointed out that an accommodative environment could not, on its own, generate the higher rates of growth that the South African economy required for employment creation.
Part of the solution, she explained, would need to come from improving much-needed infrastructure, such as in the energy, rail and ports sectors, which would strengthen export capacity.
There was also a need for sustained efforts to enhance South Africa’s ties with its traditional trading partners and also develop new trading relationships outside the eurozone.
“In these troubled times, it is important that trade relationships are not only preserved but enhanced. We are certainly living in interesting but difficult times, because the possibility that things can go horribly wrong is very high,” she said.
Edited by: Mariaan Webb© Reuse this Comment Guidelines (150 word limit)
Creamer Media Senior Researcher and Deputy Editor Online
Recent Research Reports
Steel 2015: A review of South Africa's steel sector (PDF Report)
Creamer Media’s Steel 2015 report provides an overview of the key developments in the global steel industry and particularly of South Africa’s steel sector over the past year, including details of production and consumption, as well as the country's primary carbon...
Projects in Progress 2015 - First Edition (PDF Report)
In fact, this edition of Creamer Media’s Projects in Progress 2015 supplement tracks developments taking place under the Renewable Energy Independent Power Producer Procurement Programme, which has had four bidding rounds. It appears to remain a shining light on the...
Electricity 2015: A review of South Africa's electricity sector (PDF Report)
Creamer Media’s Electricity 2015 report provides an overview of State-owned power utility Eskom and independent power producers, as well as electricity planning, transmission, distribution and the theft thereof, besides other issues.
Construction 2015: A review of South Africa’s construction sector (PDF Report)
Creamer Media’s Construction 2015 Report examines South Africa’s construction industry over the past 12 months. The report provides insight into the business environment; the key participants in the sector; local construction demand; geographic diversification;...
Liquid Fuels 2014 - A review of South Africa's Liquid Fuels sector (PDF Report)
Creamer Media’s Liquid Fuels 2014 Report examines these issues, focusing on the business environment, oil and gas exploration, the country’s feedstock supplies, the development of South Africa’s biofuels industry, fuel pricing, competition in the sector, the...
Water 2014: A review of South Africa's water sector (PDF Report)
Creamer Media’s Water 2014 report considers the aforementioned issues, not only in the South African context, but also in the African and global context, and examines the issues of water and sanitation, water quality and the demand for water, among others.
This Week's Magazine
While strongly welcoming the promulgation of the new Part 101 of South Africa’s civil aviation regulations, governing the commercial operation of civil remotely piloted aircraft (RPAs) in South Africa, the Commercial Unmanned Aircraft Association of Southern Africa...
LSM Distributors has contracted engineering consultancy WSP | Parsons Brinckerhoff Africa to undertake the R100-million restoration of the 54-year-old Kyalami racetrack, situated in Midrand. The restoration will assist in re-establishing it as a venue for...
South African Defence Minister Nosiviwe Mapisa-Nqakula has expressed the hope that the defence budget will be significantly increased over the next five years. She did so while addressing the media in her recent budget vote media briefing. The 2015/2016 defence...
The African Development Bank (AfDB) has been an implementing agency for the Global Environment Facility (GEF) since 2008. The relatively young portfolio has 28 projects over 30 countries on the continent according to the 2014 AfDB and GEF annual report released...
Investment in South African youth through apprenticeships and learnerships will not only create direct benefits for businesses but will also contribute significantly to job creation and socioeconomic transformation in the country.