Daniel Mminele, deputy governor of the Reserve Bank. Picture: FINANCIAL MAIL
Daniel Mminele, deputy governor of the Reserve Bank. Picture: FINANCIAL MAIL

THE sharply weaker rand and market volatility so far this year have "complicated" monetary policy, Reserve Bank deputy governor Daniel Mminele says.

At its meeting in two weeks’ time, the Bank will need to assess whether current interest rates remained appropriate in the face of rising risks to inflation, Mr Mminele said in a speech in London on Tuesday.

"Utmost vigilance remains the order of the day, and risks will require close monitoring as we move deeper into 2016, and preparedness to take decisive action within our flexible inflation-targeting framework if the key mandate of price and financial stability comes under threat," Mr Mminele said.

The rand has depreciated 44% against the dollar since the beginning of last year, he said.

The domestic currency is down about 7% so far this year.

The Bank’s deputy governor may have been preparing markets for more aggressive interest rate hikes by the monetary policy committee (MPC) with his comments, said Nedbank economist Isaac Matshego.

"The MPC is going to have to decide not whether it will continue raising rates, but by how much. They will not hike by 25 basis points, but by 50 basis points this month," he said.

The local currency, which has tanked to well above the R15/$ level since the meeting of the committee in November last year, has caused a deterioration in the country’s inflation outlook.

This, economists believe, will necessitate more rate increases this year compared with last year, when rates went up a cumulative 50 basis points.

Rand weakness is driven by a combination of domestic factors — such as the shock Cabinet reshuffle last month — and global developments, notably economic growth concerns in China and rising rates in the US.

"Rand depreciation remains a significant source of risk for the South African economy," Mr Mminele said.

President Jacob Zuma’s firing of former finance minister Nhlanhla Nene drove the rand above R16/$. Part of this sell-off was later reversed, but the effect on investor sentiment, as well as its effect on local business and consumer confidence, may linger, Mr Mminele warned.

Rand depreciation, electricity tariff increases, and the effect of the drought on food prices were expected to outweigh the benefits of lower oil prices this year, he said.

In addition, Mr Mminele admitted that a softer rand would not significantly boost exports due to "prevailing structural constraints".

On the economy, Mr Mminele said risks remained that growth could be lower than the Bank’s projected 1.5% this year and 2.1% next.

Modest spending by households, muted investment spending by the private sector, and low commodity prices were among the factors that would weigh on economic growth.

The drop in commodity prices between June and November last year could shave off a quarter of a percentage point from gross domestic product growth this year, the Bank estimates.

The Bank would continue to base its interest-rate decisions on economic data, Mr Mminele reiterated.