South Africa\u2019s central bank may find it difficult to achieve and sustain an inflation rate of 4.5% over the next few years as infrastructure backlogs and fiscal constraints push up the prices of key essential services, Stanlib Asset Management Ltd. said.<\/p>\n\n\n\n
Inflation has topped 4.5%, the midpoint of the target range at which the South African Reserve Bank prefers to anchor price-growth expectations, for more than three years. <\/p>\n\n\n\n
Despite this, the monetary policy committee has discussed lowering the goal, with Governor Lesetja Kganyago previously saying a single-point target of 3% would be in line with the country\u2019s peers and allow for lower interest rates.<\/p>\n\n\n\n
\u201cBringing the inflation rate fully under control \u2014 4.5% or lower \u2014 has to be focused on controlling the cost increases of key essential services,\u201d Kevin Lings, Stanlib\u2019s chief economist said in a research note.<\/p>\n\n\n\n
Extensive infrastructure backlogs and severe fiscal constraints in the public sector suggest the prices consumers will have to pay for key goods including water, electricity and health care \u201cwill continue to escalate at a relatively rapid pace for many years, adding upward pressure to inflation,\u201d he said.<\/p>\n\n\n\n
The cost of key services such as electricity and water have exceeded inflation for several years partly to allow state-owned companies to supplement declining revenues and fund infrastructure projects after years of mismanagement and underinvestment. <\/p>\n\n\n\n
On average, electricity costs were 15.2% higher in the first five months of this year than a year earlier, while water was 7.9% more expensive, according to Lings.<\/p>\n\n\n\n
Kganyago has frequently bemoaned the costs set by state companies or regulated by government institutions for keeping price growth and interest rates elevated.<\/p>\n\n\n\n
\u201cWe remain concerned about administered prices,\u201d he said last week after the MPC decided to leave the key rate at a 15-year high of 8.25%. <\/p>\n\n\n\n
\u201cWe have had to mark up electricity inflation for this forecast round, even as other categories shifted lower.\u201d<\/p>\n\n\n\n
An anticipated increase in economic activity will probably drive-up price growth for rental housing, new clothing, appliances and further impact the central bank\u2019s ability to achieve and sustain a lower inflation rate, Lings said<\/p>\n\n\n\n
A local currency that tends to weaken against the dollar on an annual basis and labor unions that command wage increases at or above the top of the target will add to the Reserve Bank\u2019s challenges, he said.<\/p>\n\n\n\n
South Africa\u2019s inflation target is set by the finance minister in consultation with the central bank. In February, National Treasury said there\u2019s a case to be made for the goal to be reviewed to improve competitiveness and offset the adverse impact price growth has on the poor.<\/p>\n\n\n\n