South Africa's central bank governor says inflation weakens case for cutting rates

JOHANNESBURG: South Africa's central bank is concerned that inflation expectations are not anchored more comfortably within its 3-6 target range, weakening the case for cutting interest rates, Governor Lesetja Kganyago said on Friday.

The bank has increased rates cumulatively by 200 basis points to tame inflation since early 2014, but left the benchmark repo rate unchanged at 7 percent on Thursday to ease pressure on an economy seen growing by around half a percent this year.

At it's previous meeting in September, Kganyago had hinted that the tightening cycle was coming to a close. Since then, consumer inflation has accelerated, inching up to 6.4 percent in October, outside the central bank's 3-6 target range and the regulator only expects a sustained return to the target during the second quarter of 2017.

"The main reason inflation is not moving much lower even as the food and currency shocks dissipate is because expectations are elevated: price and wage setters continue to believe they must demand increases close to 6 percent," Kganyago said in a statement posted on the bank's website after he gave a speech at a conference in Johannesburg on the outlook for monetary policy.

"Though inflation is slowing, it is still outside, or too close to the upper end of the target range," Kganyago said.

"This weakens the case for lowering interest rates." Kganyago said the rand might possibly end this year firmer than it started against the dollar, which would be the first time since 2010 it would have done so.

The rand has gained about 9 percent versus the greenback since early January, according to Thomson Reuters data, after shedding a quarter of its value in last year.

Some of the rand's heavy losses in 2015 came in December, when President Jacob Zuma rattled investors by unexpectedly firing the finance minister.