South African Reserve Bank Tightens

July 17, 2014

As in Turkey, whose central bank cut interest rates earlier today, South Africa faces the dilemma of both weak growth and excessive inflation.  In South Africa’s case, however, the decision was to tighten slightly.  The repo rate, which was increased by 50 basis points six months ago, was this time raised 25 basis points to 5.75%.  That’s still a lot lower than the pre-Great Recession level of 12% in December 2008.  A statement released by SARB officials blames inflation on supply-side factors in food prices and factors related to rand weakness, and claims that monetary policy is not suitable for promoting faster growth in the current circumstance.  Expected inflation is in line with the target but in increasing risk of drifting higher if the current excessive inflation rate persists.  Moreover,

the possibility of a wage-price spiral should wage settlements well in excess of inflation and productivity growth become an economy-wide norm has increased. Although the inflation trajectory has not deteriorated markedly since the previous meeting, upside risks have increased,
and it is expected to remain uncomfortably close to the upper end of the target range when it does eventually return to within the target. The upside risk factors make this trajectory highly vulnerable to any significant changes in inflation pressures.

Faced with similar circumstances, monetary officials in South Africa and Turkey went in different directions today, underscoring the role of priorities, not just data trends, in the policy-making process.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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