Francois Groepe. Picture: DAILY DISPATCH
Francois Groepe. Picture: DAILY DISPATCH

The SA Reserve Bank’s monetary policy committee (MPC) will face a difficult balancing act as it juggles a weak economy with inflationary pressures, the Bank’s deputy governor Francois Groepe has cautioned.

“We do not want to unduly constrain an already weak economy, but we must also ensure that the average South African’s purchasing power remains intact,” he said, in a speech at the UBS Economists Conference in Cape Town, posted on the Bank’s website.

The repo rate may rise gradually over the medium term to keep inflation within the 3%-6% target range, which will be based on “the forecast and the balance of risks as these stand at the time of each meeting”, Groepe said.

The next meeting of the MPC is at the end of November. Groepe said SA’s inflation outlook in particular faced external risks over the coming months. The first is potential a sharp and sustained drop in capital inflows, as US interest rates increase, while the second is a substantial rise in oil prices. This is further complicated by the exchange rate and escalating trade tension between the US and China.

“The two could also conceivably occur simultaneously. If so, SA would face increased inflationary pressure and a further drag on household disposable income,” Groepe said.

SA plunged into a recession for the first time since the global financial crisis in the first half of 2018.

“The likelihood of slightly higher nominal interest rates over the medium term must be put in context … monetary policy has been, and remains, accommodative. Had the economy not been so weak, the policy stance would in all likelihood have been different,” he said.

While SA’s growth has disappointed in 2018, which has seen the Bank revise down its growth forecast from 1.4% to 0.7%, the economy is expected to rebound in 2019, “driven largely by an export recovery and improved growth in fixed investment”.

In particular, household and government spending growth is expected to remain stable. The relatively weak level of the exchange rate coupled with firm global growth, will provide support to the export over the coming quarters, said Groepe.

“This, in turn, is projected to gradually lift private-sector capital formation. Furthermore, as the transitory shocks of 2018 fade, the low base that they would have established will support the 2019 growth rate somewhat,” he said.