South Africa\u2019s 3% inflation target can withstand a range of economic shocks as expectations have become better anchored and more forward-looking, the central bank said in a new study.<\/p>\n\n\n\n
In the absence of major shocks, there\u2019s a 78% chance that inflation will remain between the central bank\u2019s 2% and 4% tolerance band, authors Theo Janse van Rensburg, Jeffrey Rakgalakane and Rudi Steinbach said in an economic note published late Tuesday.<\/p>\n\n\n\n
South Africa formally lowered its inflation target to 3% in November, with a 1-percentage-point tolerance band, replacing the 3% to 6% range that had been in place for 25 years. <\/p>\n\n\n\n
The central bank had aimed for the band\u2019s 4.5% midpoint since 2017. Since the outbreak of the Iran war on 28 February, the nation has faced mounting price pressures. <\/p>\n\n\n\n
Restrictions on traffic through the Strait of Hormuz, a key global supply route, have pushed up oil and fertiliser costs, raising inflation to 4.5% from 3% before the war started.<\/p>\n\n\n\n
The central bank responded by raising interest rates by 25 basis points in May to 7%, before pausing in July after revising its inflation forecasts lower to support economic growth.<\/p>\n\n\n\n
Governor Lesetja Kganyago said last week that there is room for officials to continue adopting a measured approach to interest rates in the face of a polyshock.<\/p>\n\n\n\n
The study backs up this assessment. <\/p>\n\n\n\n
A typical shock to key inflation drivers such as food, oil, electricity prices, the rand and expectations would cause it to deviate by less than 1 percentage point from the 3% goal over a year, the authors wrote.<\/p>\n\n\n\n
Of the key drivers, oil poses the biggest inflation risk.<\/p>\n\n\n\n
The study found that an almost 40% oil-price shock lasting three quarters would add an average of 0.87 percentage points to inflation in the first year, with the impact peaking at just over 1 percentage point.<\/p>\n\n\n\n
Yet inflation expectations would rise by only 0.15 percentage points, it found.<\/p>\n\n\n\n
Even when several shocks occur together, the authors estimate a 62% chance that inflation will fall between 2% and 4%.<\/p>\n\n\n\n
To lift inflation by more than a percentage point for a full year, a shock that would not be considered temporary, the rand would need to depreciate by about 14%, while oil prices would need to rise by around 46%, the study found. <\/p>\n\n\n\n
Food prices would need to increase by 4.8%, unit labour costs by 5.1% and, electricity by 17.1%, and other administrative prices by 9.4%.<\/p>\n\n\n\n
The study attributes the outcomes to more forward-looking inflation expectations, particularly since the South African Reserve Bank adopted its preferred goal of 4.5% in mid-2017.<\/p>\n\n\n\n
\u201cThese results reflect increased monetary policy credibility, which bodes well for the achievement of a 3% inflation target,\u201d it found.<\/p>\n\n\n\n
\u201cIt is important to note that when lower inflation is accompanied by reduced volatility \u2013 as has been the case historically \u2013 the responses to shocks are likely to be more muted,\u201d the authors said.<\/p>\n","protected":false},"excerpt":{"rendered":"
A new study from the South African Reserve Bank found that the country’s 3% inflation rate target can withstand several economic shocks.<\/p>\n","protected":false},"author":59,"featured_media":862749,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_sma_x_autopost_status":"posted","_sma_x_autopost_error":"","_sma_x_post_id":"2097679930226098286","_sma_facebook_post_id":"191437357620492_2200494024104330","_sma_instagram_post_id":"18202904599374614","_sma_x_attempts":1,"footnotes":""},"categories":[11121],"tags":[8927,2924,25075],"class_list":["post-874609","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","tag-lesetja-kganyago","tag-reserve-bank","tag-strait-of-hormuz"],"_links":{"self":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/874609","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/users\/59"}],"replies":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/comments?post=874609"}],"version-history":[{"count":6,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/874609\/revisions"}],"predecessor-version":[{"id":874618,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/874609\/revisions\/874618"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media\/862749"}],"wp:attachment":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media?parent=874609"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/categories?post=874609"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/tags?post=874609"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}