Elevated Inflation Risks Concern the SARB

SOUTH AFRICA - In Brief 21 Nov 2013 by Iraj Abedian

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In our opinion, the most important message to take from today’s MPC meeting is that currency volatility and weakness complicates the inflation outlook. Despite a recently adopted move to reduce exposure to the US dollar, the South African Reserve Bank (SARB) has generally not shown a keen interest in intervening to shield the domestic currency against external headwinds. Actually, the SARB’s new asset allocation strategy is somewhat too little too late. South Africa’s international reserves levels are inadequate, to put it mildly. As such, the vulnerability of the rand to external shocks remains dangerously entrenched. A reduction in US monetary stimulus will in all likelihood lead to capital outflows from South Africa and other emerging market economies with wide current account deficits. If this scenario were to pass in the first quarter of 2014, then the odds are that the SARB will increasingly consider pulling the trigger to sedate the effect of a weak rand on the inflation outcome. In any case, we conjecture that the SARB will only ditch its protracted neutral stance once the 2014 general elections dust has settled. For now, the benchmark rate remains at 5 percent a year as the Bank tries to wade through a landscape of muted growth prospects and elevated inflation risks.