Inflation will need to rise above the South African Reserve Bank’s (SARB) target range over a longer period before the bank considers raising interest rates, according to a statement made by SARB Governor Lesetja Kganyago. Kganyago also said he expected the local bond and stock markets to drop as the US economy recovered and interest rates in the world’s biggest economy rose.
SARB, which holds its third policy meeting of 2015 on Thursday this week, has said it expects inflation to trend higher in coming months, but only sees a temporary breach of its 3% to 6% target band in the first quarter of 2016. It has held base interest rates at 5.75% since increasing them by 25 basis points in July 2014. Annual consumer inflation is currently running well within the target range at 4%, and most economists expect rates to remain unchanged until at least the latter part of 2015.
“If we see that there are temporary breaches of the inflation target, there is no need for us to respond. If they are sustained, we respond,” Kganyago said. The rand has weakened nearly 3% against the dollar this year, dragged down partly by capital flight from emerging markets as investors anticipate higher US rates. But raising interest rates without establishing crucial fundamentals like adequate energy supply, labour skills and policy certainty would not be enough to attract investment, Kganyago said further and concluded: “When we normalise rates, we are doing so because we are dealing with the inflation outlook, not because we are competing for capital!”.