The South African central bank’s inflation target of 3-6 percent target will be breached twice in 2016 with a worsening long-term outlook, Governor Lesetja Kganyago said on Thursday.
“Of course we are in a tight spot, because as we say inflation next year we expect it to be out of the target in the first and fourth quarter. The long-term expectations are a little bit worse, they are at 7 percent,” he told reporters.
Speaking at a conference just outside Cape Town a day after the Treasury’s three-year budget outlook, Kganyago said the inflation outlook faced “sizable risk” because of the weakening of the rand and the price determination processes.
Inflation is currently running at 4.6 percent.
Kganyago said monetary policy would respond if the U.S Federal Reserve rate hike caused second round effects such as a depreciation of the rand currency, inflation and a repricing of assets.
“Our response would not be a response to Fed moves, our response would be to the second round effects from the depreciation of the currency,” he said.
An emerging market sell-off is expected to ensue should the U.S. Federal Reserve increase interest rates as the world’s biggest economy shows more signs of recovery after 2008’s recession.
The rand has lost almost 18 percent this year against the dollar.
Kganyago also said the central bank could not be complacent about the exchange rate adding that the inflation outlook was not favourable but that it would be within the target range in the medium term.