South African inflation may reach the upper end of the central bank’s 3 percent to 6 percent target range “sooner than expected” as oil and food prices increase, South African Reserve Bank Governor Gill Marcus said.
While there is limited scope for the bank to cut its benchmark interest rate further, raising the rate may undermine the economy’s recovery, Marcus said in a speech on Friday in Pretoria, according to a written copy on the bank’s Web site.
The bank left its benchmark interest rate unchanged at a 30-year low of 5.5 percent on Jan. 20, as three rate cuts last year helped to spur consumer spending and food and energy costs climbed.
The rand has also reversed some of its gains of last year, weakening 8.8 percent against the US dollar since the beginning of the year, adding to price pressures.
“Should food and oil prices impact on domestic inflation by more than is currently expected, we may see inflation moving towards the upper end of the target range sooner than expected,” Marcus said.
In countries where inflation pressures are rising and economic growth is still weak, “raising interest rates will not only exacerbate the fragility of the recovery, but may not do much to alleviate the first-round effects of these shocks,” she said.
Inflation slowed to an annual 3.5 percent in December from 3.6 percent the month before, remaining inside the central bank’s target range. The bank on Jan. 20 raised its inflation forecast for this year to an average of 4.6 percent from 4.3 percent, and its estimate for next year to 5.3 percent from 4.8 percent.
The bank expects economic growth to average 3.4 percent this year and 3.6 percent next year, which is “somewhat below the market consensus,” Marcus said.
Consumer spending is “exhibiting signs of a sustained recovery,” she added.
Africa’s biggest economy expanded an annualized 2.6 percent in the third quarter, down from 2.8 percent in the previous three months, the statistics office said on Nov. 23.
“The South African recovery has been relatively hesitant,” Marcus said. “However, recent indicators are more positive and suggest that the recovery will be sustained, and we can look forward to more vibrant growth in the coming years. But significant challenges remain.”
Growth still isn’t fast enough to cut the jobless rate significantly, Marcus said. South Africa’s unemployment rate of 25.3 percent is the highest of 61 countries tracked by Bloomberg.