Briefing reporters following the Monetary Policy Committee (MPC) meeting, Reserve Bank Governor Gill Marcus said that although the sustained breach of the bank’s inflation target range was not central to forecast, upside risks to the inflation outlook required careful monitoring.

“Should the risks to the medium-term inflation outlook deteriorate significantly, the MPC will not hesitate to take appropriate action in order to maintain the integrity of the inflation targeting framework and to anchor inflation expectations at a lower level.

“At this stage, however, given the global uncertainties and downside growth risks, the MPC has decided to keep the repurchase rate unchanged at 5% annum,” said Marcus.

South Africa’s Consumer Price Index (CPI) rose to 6.4% year-on-year in August, again falling out of the Reserve Bank’s inflation target range of 3% to 6%. In July, CPI rose to 6.3% year-on-year.

Of this, the central bank said, the current breach of the target range was still expected to be temporary and that the peak was possibly reached in August.

On a month-on-month basis, CPI increased by 0.3% in August, with fuel and food prices as the main offenders in the annual rise.

CPI increased by 0.3% month-on-month in August, slowing from a 1.1% month-on-month rise in July.

The bank’s inflation forecast for 2013 was unchanged at an average of 5.9%, but now it was expected to average 5.8% in 2014, compared with 5.5% in the previous forecast. Meanwhile, the forecast for 2015 has been raised from 5.2% to 5.4%.

The bank attributed the deterioration in the forecast mainly due to the exchange rate of the rand and petrol prices, “but given the overnight developments, these assumptions will be revisited on an on-going basis”.

The central bank noted that the exchange rate of the rand has been highly volatile since the last meeting of the MPC. This comes against the backdrop of a widening current account deficit, domestic labour disputes and the reversal of capital flows to emerging market economies.

“The risks to the inflation outlook from the exchange rate remain elevated and dependent on its future trend. A sustained depreciation trend could pose a significant risk to the inflation outcome,” said Marcus.

The rand is expected to remain sensitive to global sentiment as well as to the current account deficit, which widened to 6.5% of Gross Domestic Product (GDP) in the second quarter of 2013.

The deficit is expected to narrow in the coming months in response to the depreciated currency but this will be slow given the import-intensive nature of capital expenditure by state-owned enterprises in particular, noted the bank.

“Export revenues are hampered by weak external demand, strike activity in the mining and motor vehicles sectors in particular, and declining terms of trade. The stepping up of exports is critical to address the current account deficit,” explained Marcus.

Wage settlements a concern

The central bank expressed concern at the trend of wage settlements.

“The trend of wage settlements remains an upside risk to inflation and job creation. The current wage bargaining round has seen a wide range of settlements, generally above the current inflation rate. The overall average wage settlement rate in collective bargaining agreements was 7.9% in the first half of 2013, and this is likely to have increased in the third quarter.

“We are concerned that the increase in productivity, although relatively low, reflects job losses and a switch to more capital intensive production,” Marcus said at the second last MPC meeting of 2013.

Market expectation was for the MPC to keep the repo rate unchanged.

“We expect the MPC to leave rates unchanged given the continued dilemma of under trend economic growth…” said Nedbank in its weekly economic monitor earlier this week.