Central bank says persistent CPI target breach will require policy response

South Africa's central bank will tolerate temporary breaches of its inflation target to smooth out short-term fluctuations in economic growth, but a persistent breach will require a policy response, Deputy Governor Daniel Mminele said.

The South African Reserve Bank (SARB) raised its benchmark repo rate by 25 basis points to 7.0 percent last month, in an effort to tame rising inflation, despite fears about waning economic growth.

Mminele reiterated that the SARB would pursue its mandate to keep inflation in a 3-6 percent range within a flexible policy framework, implying that it would tolerate temporary breaches of the inflation target in the interest of growth.

"However, a persistent breach of the inflation target range will require a policy response to achieve sufficiently low inflation that promotes competitiveness," he added.

He said the overall monetary policy stance continued to be supportive of the weak economy with the necessary policy tightening having proceeded at a moderate pace while seeking to counter mounting inflationary pressures.

"It is, however, worth reiterating that over the long run South Africa’s growth prospects are best served by keeping inflation within the target range, and not by looking to exploit a temporary trade-off between growth and inflation," Mminele said.

The steady depreciation of the rand was of particular significance for monetary policy, Mminele said.

"While the rand exchange rate has recovered from the lows experienced in December 2015, it remains volatile and vulnerable to domestic and external developments," he said.