Reserve Bank sounds warning on inflation

"Uncertainty regarding future developments in cost-push pressures and the exchange rate pose an upside risk to the outlook, which more than offsets the downside risks from possible contagion effects from the European crisis and associated slow growth," said the bank in its Monetary Policy Review released today, Tuesday 23 November 2011.

The inflation rate is expected to continue trending upward, moving above the upper level of the target range from the fourth quarter of 2011 to the third quarter of 2012. The target range is between three and 6%.

Oil, exchange rate, electricity costs could impact inflation rate

The bank expects the inflation rate to peak at 6.3 % in the first three months of 2012, conditional on an unchanged repurchase rate. CPI is projected to average around 5.2% in the fourth quarter of 2013.

The bank said movements in the prices of oil, electricity prices or the exchange rate that differ from those assumed for the forecast will impact on the central projection. The Reserve Bank's forecast makes provision for electricity price increases of 17.3% in the third quarters of 2012 and 2013.

Last month, at the Monetary Policy Committee's sixth and last meeting for the year, the central bank left the repo rate unchanged at 5.5%, seeing that the economic recovery remained hesitant with a deteriorating inflation outlook. The last time the central bank cut the repo rate was in November 2010 - cutting it to its lowest in a period of 30 years.

"The MPC will not hesitate to respond timeously to signs that threaten to move inflation out of the target range on a sustained basis."

South Africa's economy has been significantly affected by global developments and domestic constraints to the recovery.

"The domestic recovery remains hesitant and confidence low," it said

The review is released twice a year.