In South Africa Weaker rand a major inflation risk - Central Bank

The rand extended losses on those comments, having fallen earlier after the revenue agency reported a wider-than-expected trade deficit in October.

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South African rand notes in a file photo. REUTERS/Siphiwe Sibeko play South African rand notes in a file photo. REUTERS/Siphiwe Sibeko
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The depreciation in South Africa's rand currency has been an important contributor to inflation and is a major risk to consumer price forecasts, the central bank said on Monday, as the currency touched a record low.

The rand extended losses on those comments, having fallen earlier after the revenue agency reported a wider-than-expected trade deficit in October.

The South African Reserve Bank governor said no amount of intervention would stem market-driven rand moves.

"We've go to accept that a currency that moves because of changes in fundamentals, no amount of central bank intervention ... would stem that movement of the currency," Lesetja Kganyago told economists at a monetary policy forum.

In its twice-yearly monetary policy review, the bank said the exchange rate continues to exert inflationary pressure.

"Additional depreciation – which could be triggered by further falls in the prices of South African export commodities, or by (U.S. Federal Reserve) Fed (interest rate) lift-off – is the most significant risk to the inflation forecast," it said.

The rand, like other emerging market currencies, has weakened sharply against the dollar this year as investors anticipate that the Fed will start raising interest rates.

In its review, the bank said that the response to relatively low interest rates in Africa's most industrialised economy had been disappointing, while investment growth had been subdued.

The bank, which raised interest rates to 6.25 percent this month, reiterated that the priority for monetary policy was to keep inflation within a 3-6 percent target range.

Headline consumer inflation ticked up to 4.7 percent year-on-year in October compared with 4.6 percent in September.

The economic output gap remained negative and therefore monetary policy continued to be accommodative, the bank said.

"The real repo rate is still low in historical and comparative perspective, and somewhat below its estimated neutral level," it said.

Kganyago said he still expected the U.S. Federal Reserve to raise interest rates in December.

"Our baseline scenario is that we expect that the U.S. will lift rates in December," he said.

Even if U.S. non-farm payrolls data on Friday disappoint, the Fed is still expected to lift interest rates at its meeting on Dec. 15-16 given near full employment.

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