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Sarb says spending misses pose risk to lower inflation

Finance

Persistent, weak South African economic growth and difficulty in sticking to spending targets may disrupt the return to lower inflation, showing the need for consistency in fiscal policy, the central bank’s chief economist said.

Policymakers prefer to anchor inflation expectations at the 4.5% midpoint of the target range, a level it was last at in 2021 and is only expected to settle there next year, according to Reserve Bank projections.

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“Staying at this level will require long-term inflation expectations once again returning to the 4.5% level,” Chris Loewald, head of economic research at the South African Reserve Bank, wrote in a chapter of a newly published book titled Monetary Policy Responses to the Post-Pandemic Inflation. “Macroeconomic policy consistency has become more important as a continued path of fiscal slippage and weak underlying growth risks derailing the envisioned disinflation.”

Loewald’s comments underpin South Africa’s frail public finances and weak expansion. Africa’s most industrialised nation has consistently missed its debt targets and the annual average growth rate was less than 1% in the past 10 years.

Finance Minister Enoch Godongwana will deliver the national budget on February 21 where he will have an opportunity to show the country’s commitment to rein in liabilities as demands on public finances increase ahead of elections due to be held this year.

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The vote is expected to be the tightest since the ruling African National Congress took power in 1994. Polls suggest it may lose its majority for the first time.

The Reserve Bank has repeatedly highlighted fiscal risks as a threat to its job to quell inflation, warning that they could keep borrowing costs higher for longer.

At its last meeting, the monetary policy committee voted to keep the benchmark interest rate at a 2009 high of 8.25%. Governor Lesetja Kganyago said there was no discernible evidence that inflation is cooling to the midpoint of its 3% to 6% target band.

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“For now, the main priority is to get inflation back to target,” Loewald said. “The price formation process would also benefit from the removal of longstanding structural impediments, such as product and labour-market rigidities, poor education outcomes, inefficient infrastructure, weak governance, and high policy uncertainty.”

These measures would aid jobs growth, boost investment and bring economic growth back toward emerging-market averages.

Rolling power cuts, clogged ports and inefficient railways that reflect inadequate investment and poor management have handicapped the economy for years.

Read: Inflation cools to 5.1% in December

“The successful implementation of reforms will require a gradual but sustained approach and will depend on having strong and independent institutions,” Loewald said.

© 2024 Bloomberg

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