PRETORIA (Reuters) – South African inflation is above its 3-6 percent target band and could rise further in a deteriorating domestic economic environment, Deputy Central Bank Governor Daniel Mminele said on Tuesday.
“Monetary policy in South Africa is currently facing an increasingly challenging situation, as the domestic economic growth outlook has deteriorated markedly even as inflation broke out of its target range,” Mminele told financial market professionals in Pretoria.
Inflation rose above the central bank’s and market expectations in May when it came in at 6.6 percent.
The South African Reserve Bank’s Mminele said domestic demand has slowed, and the current tightening cycle, aimed at fighting off inflation, “need not match the speed and magnitude of earlier cycles”.
The last tightening cycle came between mid-2006 and mid-2008 when rates went from 7 percent up to 12 percent.
A weakening rand has been a major cause of higher prices, hitting a string of 5-year lows at the start of the year when the bank hiked interest rates by 50 basis points to 5.5 percent.
The currency has since recovered and was trading at 10.61 to the dollar on Tuesday, partly because the AMCU union and platinum producers came to a resolution to end a crippling 5-month platinum sector strike.
However, Mminele warned that South Africa’s bond market, supported by carry trade activity in May, could be vulnerable to risks of a fresh debt sell-off globally, while domestic stocks finally appear increasingly expensive.
He said the market should not expect policy makers to keep commenting directly on short-run market movements, as this could add to volatility.
