By Ntando Thukwana.
South Africa’s central bank chief said policymakers will “very carefully” monitor incoming data to guide their next rate decisions, as the Iran war clouds the inflation outlook and injects fresh uncertainty into the global economy.
“In our next few meetings, we will have to make tough decisions about whether second-round effects are coming or whether we have enough space to look through,” Lesetja Kganyago told an audience on Monday at Rhodes University in the Eastern Cape province.
“We are not going to pre-commit to a path and give up optionality,” he said.
“We cannot offer certainty about our next steps. Instead, we want to maximise certainty about where inflation is going – specifically, that it is going back” to the bank’s 3% target, he said.
Policymakers will deliver their next interest-rate decision on May 28, after holding borrowing costs at 6.75% in March to assess the fallout from the Iran war.
Oil prices have surged almost 60% since the conflict erupted in the Middle East on 28 February and effectively closed the Strait of Hormuz, a key artery for about a fifth of global crude and liquefied natural gas flows. Domestic diesel prices have jumped to a record level.
Kganyago acknowledged that while the shock from the war hit as the economy transitioned to a lower inflation target of 3%, policymakers remain committed to steering it back to that level.
“That is really our most important message: although we cannot do much about higher inflation right now, we are very committed to getting inflation back to 3%, just where we had it before the shock hit,” Kganyago said.
“It seemed we were going to complete the disinflation soon, perhaps this year. Now this process will take longer.”
The inflation rate edged up to 3.1% in March from 3% a month earlier and is expected to spike in the coming months because of higher energy and food prices.
“We are experiencing the biggest jump in fuel-price inflation in the history of inflation targeting, Kganyago said, adding that food prices present an even greater risk. The Middle East conflict has significant implications for fertilisers and diesel – both key inputs in food-supply chains, he said.
Persistently high food prices alongside the fuel shock also pose risks to inflation expectations, the governor said.
“In these conditions, we will be studying the data very carefully, both to assess how these variables are playing out and to see if there is early evidence of underlying inflation starting to move,” he said.
The data under review include surveys of inflation expectations, wage indicators, and core inflation – a measure of underlying price pressures, Kganyago said.
“If we do have to raise rates, it will be to sustain low and stable inflation, and all the benefits that brings,” he said.
The bank’s quarterly projection model shows inflation peaking at 4.3% for April, while it sees fuel-price growth accelerating to 18.3% during the second quarter of this year.
“Kganyago also indicated global monetary trends will weigh on decisions, saying “it is hard to sit out a global tightening cycle”.
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