The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL
The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL

The Reserve Bank expects interest rates to rise in the next two years to help contain accelerating inflation, it said in its latest monetary policy review (MPR).

Its quarterly projection model shows the repo rate increasing from 6.5% to 7.7% by the end of 2020.

"Although inflation has been quite well behaved for much of the year, it has now begun to accelerate, and we should expect it to be over 5% through 2019 and 2020," said Bank governor Lesetja Kganyago in the foreword of the monetary policy review, released on Monday. The Bank’s inflation target is between 3% and 6%.

The Bank has made it clear that the monetary policy committee is "uncomfortable" with inflation expectations closer to the upper end of the target range and would prefer inflation anchored at the midpoint of 4.5%. Inflation was at 4.9% in September.

The committee is expected to hold rates steady when it announces its next decision on November 22.

Rising oil prices and a weaker rand have weighed on SA’s economy, which fell into recession in the second quarter for the first time in nearly a decade.

Despite the rising inflation outlook, the Bank has kept rates unchanged since a 25-basis point cut in March, as the economy remains weak. Last week the Treasury cut its growth forecast for the year to 0.7%, from a previous estimate of 1.5%.

The Bank also warned that SA will struggle to return to its longer-term growth rate of around 3% a year as emerging markets face headwinds and the country’s fiscal and current account deficits are above 3%.

It estimates that SA’s potential growth will be less than 1.5% — a far cry from the 5.4% called for by the National Development Plan to cut unemployment and poverty, and below the 3% target set by President Cyril Ramaphosa earlier this year. Before the financial crisis, the Bank forecast long-term growth at 4% and cutting this to 2% in 2014. "The technical recession in the first half of this year is a reminder that the economy will not simply return to its old growth path without some deeper macroeconomic recalibrations," reads the review.

Higher US interest rates and the stronger dollar have discouraged capital flows to emerging markets, weakening their currencies, warned the Bank. Added to this, the fiscal and current account deficits make SA "relatively more vulnerable to changing global financial conditions", it warned.

The medium-term budget policy statement presented last week showed that the fiscal deficit is expected to widen to 4.3% of GDP, higher than the February estimate of 3.8%. The current account deficit was 3.3% of GDP in the second quarter.

The rand, which has lost 15% against the dollar this year, is "significantly undervalued", it said. The currency’s real effective exchange rate is forecast to strengthen to just over R14/$ by the middle of 2019, according to the review. With Bloomberg

menons@businesslive.co.za

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