South Africa's monetary policy will maintain its focus on hitting a 3-6 percent inflation target over the medium term but will remain sensitive to the domestic economic situation, Reserve Bank Governor Gill Marcus said on Tuesday.
Marcus told a meeting of the Swiss Chamber of Southern Africa that the developments in the exchange rate -- which has been hit by bouts of risk aversion due to uncertainty over the euro zone debt crisis -- had implications for monetary policy.
The South African Reserve Bank's monetary policy committee (MPC) left its repo rate unchanged at 5.5 percent as expected last week as it balanced concerns over sluggish economic growth with rising inflation.
The rand exchange rate was now seen imparting an upside risk to the inflation outlook, Marcus said, reiterating the bank's view that inflation would exceed the 3-6 percent target range towards the end of this year.
From a monetary policy perspective the challenge is not only to take a view on the future path of the exchange rate, but also the impact of these moves on inflation, Marcus told the Swiss Chamber, which promotes economic ties between Switzerland the southern Africa.
The view of the MPC at this stage is that underlying support for the rand is still there, as the factors that led to the strong rand in the first place still prevail, and interest rates in the advanced economies are expected to remain lower for longer.
In a separate interview on private station Talk Radio 702, Marcus acknowledged that rand volatility made life uncertain for the business sector, but added there was not much that the Bank could do to control it.
The Bank had to balance what was happening with the economy -- whose growth forecasts both the Reserve Bank and the Treasury have revised downwards -- while not being soft on inflation.
Government bonds extended losses after Marcus's speech, which some market players took as a hint that another interest rate cut was unlikely.
The yield on the 2015 bond jumped to 6.94 percent, its highest since October 4. before coming back to 6.83 percent, still up 16 basis points from Monday's close.
The rand was last trading at 8.1170 to the dollar after hitting two-week lows of 8.1499, mainly driven by worries that there was no end in sight for the euro zone debt crisis.
EURO ZONE RISKS
Marcus said a meltdown in the euro zone would have severe implications for the global economy and South Africa, and that the MPC was prepared to take appropriate action should the need arise.
She warned that the combination of rising inflation and sluggish domestic growth holds the risk of a stagflationary environment.
In a question and answer session at the Swiss Chamber, Marcus underscored the independence of the Bank, adding that it had never suffered interference from President Jacob Zuma.
Zuma rose to power two years ago on the back of strong support from unions and the Communist Party, both of whom want much looser monetary policy.