“Since the previous meeting of the Monetary Policy Committee meeting, the economic growth outlook has deteriorated against the backdrop of protracted strike action in the mining and manufacturing sectors,” Gill Marcus, South Africa Reserve Bank governor, said during the Monetary Policy Committee meeting address on Thursday.
“The economy contracted in the first quarter of 2014, and the growth outlook for the rest of the year remains subdued.”
The repo rate now stands at 5.75 per cent.
Inflation has breached the upper range of the target range, which was driven primarily by the exchange rate depreciation and rising food prices.
Average inflation expectations according to business people and trade officials for the year and 2015 however remained unchanged for six consecutive quarters at 6.1 per cent. A decline to 5.9 per cent was also expected in 2016.
(READ MORE: S.Africa's economy facing "enormous headwinds" -Marcus)
“South Africa’s growth outlook has deteriorated, compounded by continuing labour disruptions. Following a contraction of 0.6 per cent in the first quarter, the outlook for the second quarter is expected to be positive but subdued particularly in the light of weak mining and manufacturing data in May,” Marcus explained.
The mining sector contracted by an annualised 24.7 per cent in the first quarter of 2014, mainly driven by the five-month long strike.
Marcus added that a growing concern for the MPC was that the recent wage settlements in the mining industry and strikes could set a precedent for more demands in future, which could pose more challenges for the economy.
“While the strike is over and miners are returning to work, PGM production is not expected to normalise for some time, and possible shaft closures could reduce the longer term potential of the sector,” she added.
In addition to the contraction within a major production industry in the country, another increase in petrol price, albeit small, could be on the cards in August if current negative trends persist.
(READ MORE: S.Africa's MPC keeps rates on hold at 5.5%)
“The MPC faces an increasingly difficult dilemma of rising inflation and slowing growth. The core mandate of the bank remains price stability,” said Marcus.
“At the same time in achieving this mandate, we have to be mindful of the impact of our actions on economic growth and tread a fine line between acting effectively to address inflation while not undermining growth unduly.”