Reserve Bank keeps close eye on inflation

Wednesday, May 25, 2011

Pretoria - The Reserve Bank has vowed to keep a watchful eye on second-round effects of inflation, it stated in its May Monetary Policy Review.

"The MPC will remain vigilant with respect to indications of second-round effects or generalised inflation, and will not hesitate to take timeous appropriate action, particularly if inflation is expected to move out of the target range on a sustained basis," said the central bank on Tuesday.

The bank would continue to give primacy to its objective of price stability and implement monetary policy within a flexible inflation-targeting framework.

Domestically and globally, the inflation environment has deteriorated markedly as a result of food and oil price increases. The Reserve Bank said the acceleration in food prices is expected to persist for some time "despite indications that global food price inflation may have peaked, and international oil prices have displayed considerable volatility recently."

The challenge facing monetary policymakers is to determine whether these developments are temporary or permanent, which many concede is not an easy task.

"This then becomes a fine balancing act for the MPC, as a flexible inflation-targeting framework requires that monetary policy actions be mindful of the impact on the real economy as well. This is particularly the case when the domestic economy is relatively fragile and there is underutilised capacity," said the bank in its review.

Earlier this month, the bank kept the repo rate unchanged at 5.5 percent. There was a revision to the CPI forecast of the bank, with inflation now expected to reach the upper limit of the inflation target range during the final quarter of 2011, and to peak at 6.3 percent in the first quarter of 2012.

It is expected to return to within the target range by the second quarter of 2012.

"This does not mean that these inflation developments can be ignored," noted the report.

When coming to domestic growth, this remained below potential, and although growth is expected to be sustained, it is likely to be below that of emerging market economies in general.

"This is due, in part, to the persistently low growth in fixed capital formation, the uncertain growth prospects in some of South Africa's traditional trading partners and to possible constraints on consumption expenditure growth."

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