Stressing the need for a low and stable inflation rate in order to limit the negative impact on the poor, Marcus also said that “the advantage of flexible inflation targeting is that it sets out clear goals for monetary policy as well as public accountability”. The Governor once again communicated that while the mandate of the Reserve Bank was to target inflation, she said that monetary policy would be conducted in such a way that it is in the “best interest of sustainable development and growth”, stating that there are some instances where it may be appropriate to miss the target (due to exogenous shocks).
Finance Minister Pravin Gordhan’s letter to Marcus clarifying the Bank’s mandate was again brought into the spotlight, where the Governor again clarified that the letter rather served to “underlie” the independence of the Bank rather than “undermine” it.
Absa Bank: These comments do not really differ from those communicated previously, where the Reserve Bank’s commitment to low inflation and the country’s growth and development objectives remain the core focus of the Bank. Although we, much like the Bank, look for headline CPI to continue to track lower in the near term, touching around the 5% level in Q2, we believe the sticky structural nature of prices in the economy (particularly through administered prices) will see inflation battle to fall to sustainably low levels in the medium term. Furthermore, evidence in both supply- and demand-side indicators pointing to the recovery continuing to gain momentum suggest that the Bank’s 2.6% growth forecast for 2010 may be overly pessimistic, in our view. This leads us to believe that we have reached the trough in interest rates in this cycle, with the policy interest rate likely to remain at 6.5% for the remainder of the year.
Source: Absa Capital Research
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