Reserve Bank governor Lesetja Kganyago. Picture: SUPPLIED
Reserve Bank governor Lesetja Kganyago. Picture: SUPPLIED

The recovery in economic activity is expected to be "weak and choppy", South African Reserve Bank governor Lesetja Kganyago has cautioned.

This was especially because consumer demand slowed again in the second quarter of 2018, Kganyago said in a briefing to parliament’s finance committee on Wednesday.

The bank expects modest GDP growth in 2018 and Kganyago said this should be lower than initial expectations. The Bank has projected average growth rates of 1.2% for 2018, 1.9% in 2019 and 2% in 2020.

The governor said that while inflation remained within the inflation target, Bank "risks are on the upside" and included the weakening exchange rate, rising oil prices and increasing electricity prices, and remuneration increases in excess of inflation and productivity.

"Anchoring inflation expectations at the midpoint of the inflation target range will ensure that inflation remains firmly within the inflation targeting range thus limiting the need for MPC (monetary policy committee) action," Kganyago said.

In an interview after the briefing, he said the rand exchange rate, given the current currency turmoil, posed a risk to the inflation outlook, especially if the depreciation is sustained.

The rand has weakened markedly against the dollar following the decision of the US government to impose sanctions on Turkey. This has caused the lira and other emerging market currencies to plummet.

Kganyago said in the interview that the uncertainty did not help, especially as there was no way of knowing how the US would act in future and which country would be subjected by it to higher tariffs. This affected global financial markets.

He emphasised, however, that central banks did not control exchange rates and got involved in exchange rates only when there was disclocation in financial markets — which was far from currently being the case.

“There is liquidity in this market and there is trading. You might not like the price that is there but the market is trading,” Kganyago said.

On Wednesday, the rand weakened sharply at lunchtime, in contrast to the lira, which had fared better on the day.

Apart from the weakening exchange rate, the other risks to inflation cited by Kganyago were rising oil prices, increasing electricity prices, and remuneration increases in excess of inflation and productivity.

Inflation has been kept within the 3%-6% target band for more than a year.

In its July statement, the MPC said headline inflation was expected to average 4.8% in 2018 (down from 4.9%) before increasing to 5.6% in 2019 and decreasing again to 5.4% in 2020.

The Bank left the repo rate unchanged at 6.5% and reduced its growth forecast for 2018 by 0.5 percentage points to 1.2%, signalling it was unlikely to respond to faster inflation by raising rates.

Kganyago told MPs during the briefing that fixed investment was not expected to pick up meaningfully in 2018.

"Weak demand should prevent an acceleration in consumer and capital goods imports, which is expected to contain the current-account deficit during the remainder of 2018," the governor said.