Reserve Bank deputy governor Daniel Mminele. Picture: PUXLEY MAKGATHO
Reserve Bank deputy governor Daniel Mminele. Picture: PUXLEY MAKGATHO

In a sign that consumers could face an interest-rate increase before the year is out, Reserve Bank deputy governor Daniel Mminele has warned that inflation could overshoot the 6% upper limit of its target band.

"Given the volatile environment, the risk of an overshoot of the target, given the balance of risks, should not be under-estimated," he said in New York on Tuesday, in a speech posted on the Bank’s website.

The Bank, which kept rates unchanged in September after a vote by the monetary policy committee, will next decide on policy on November 22.

Some economists say it may start a rate-hiking cycle, after a weaker rand, higher oil prices and turmoil in emerging markets worsened the outlook on inflation.

The Bank expects headline inflation to peak at 5.9% in the second quarter of 2019 and settle at 5.4% towards the end of 2020, according to its latest estimates released in September. While this is within the 3%-6% target range, the Bank has made it clear in the past that it prefers the measure to be close to 4.5%.

An interest-rate hike will knock consumers, who are already burdened by higher taxes and record petrol prices.

So far in 2018, crude has climbed almost 25% while the rand has lost just over 12% against the dollar. The rand weakened almost 1% on Tuesday following a 2.7% jump in the price of Brent oil overnight.

Constrictions on Iranian output due to US sanctions were given as the primary reason for oil’s push above $85 a barrel, a four-year high.

Economists said the rand was expected to remain on the defensive as oil prices and the approval of electricity price increases had put upwards pressure on inflation.

There are mounting market expectations of an imminent oil-price bull run, with investors seemingly awaiting a catalyst that could see oil push towards $100 a barrel, said Oanda analyst Stephen Innes.

"An extended and sizable deviation in inflation from the midpoint of the target range will raise the risks of medium-term inflation expectations drifting back to if not above the top end of the range," said Mminele.

While intervention in currency markets to stabilise the rand remained part of the Bank’s tool kit, it would use that option only if "excess volatility or abrupt and disorderly adjustments" threatened the market, he said. "Our preference has been to deploy this tool if there are signs of the orderly function of markets being threatened, rather than to go against the grain of the market."

Consumer-price readings have been below consensus expectations seven times over the past year, including in September. Average inflation for the second quarter, which was 4.4%, fell short of the Reserve Bank’s expectations.

Figures from Stats SA last month showed that consumer inflation had surprised to the downside in August, slowing to 4.9% from the previous month’s 5.1%.

With Karl Gernetzky