South Africa’s central bank will redraft its risk scenarios for its next rate-setting policy meeting as the widening Middle East conflict pushes up oil prices, the country’s central bank governor told Reuters.
The central bank is scheduled to decide on March 26 on interest rates after keeping its main lending rate unchanged at 6.75% in a split decision in late January, citing at the time that policy makers wanted to see inflation expectations fall further.
“We had our baseline (in the January meeting) and we had an optimistic scenario and an adverse scenario,” said South African Reserve Bank Governor Lesetja Kganyago. He said the adverse scenario had assumed the average oil price for the year would reach $75 per barrel and the rand would weaken to 18.50 to the dollar.
Now the previous adverse scenario, he said, “is gone – it was in the past … we will come up with a completely new one.”
The Middle East crisis set off by Israel and Washington’s bombing of Iran lifted Brent crude futures to more than $94 per barrel this week, while the rand weakened to 16.82 to the dollar.
Kganyago said a 10% move in the exchange rate would have a much stronger impact on inflation in South Africa than a similar jump in oil prices.
“Yes, it’s the adverse scenario, but it is not playing out as we had feared,” Kganyago said, adding that policy makers would only get concerned once they saw the impact of the exchange rate filter through to prices.
“The call that as a policy maker you must make is – is this transitory, or is it persistent? And you only respond to the persistent, not to the transitory – and that is not an easy call to make.”
The knock-on effects from global tensions that have kept markets on edge in recent months – and the most recent crisis – would be dominating discussions at the next meeting, Kganyago added, speaking on the sidelines of an investor conference in London.
“We will discuss what is the impact of this geopolitics on the markets, on oil, emerging markets, and on exchange rates.”
Asked whether South Africa would continue to buy dollars – as it has since the start of the year – after the rand weakened nearly 4% this week against a strong greenback, the governor said the policy had not changed.
“If we think that there are cheap dollars available in the market, we will pick them up,” he said, adding that overall reserve levels had been bolstered not only by dollar purchases, but by the rising value of gold in the central bank’s war chest and the proceeds of borrowing by the Treasury.
Central bank data released earlier on Friday showed that South Africa’s net foreign reserves rose to $75.84 billion at the end of February from $74.88 billion in January.
