“Rand depreciation continues to be the main upside risk to the domestic inflation outlook”

South Africa’s central bank said it’s focusing on the core inflation rate to assess whether the effect of a weaker rand is feeding through to prices in the economy.

“Rand depreciation continues to be the main upside risk to the domestic inflation outlook,” the Reserve Bank said in its Monetary Policy Review released in Pretoria today. The core inflation rate, which strips out food and energy costs, “has tracked higher and is the focus of heightened scrutiny.”

The rand has lost 16 percent against the dollar this year, the worst performer among 16 major currencies tracked by Bloomberg, threatening to push inflation outside the central bank’s 3 percent to 6 percent target band. While Governor Gill Marcus kept the benchmark interest rate unchanged at 5 percent on Nov. 21 and forecast inflation will remain within the target, she said risks to the inflation outlook have increased in the face of further rand weakness.

“A significant deterioration in the risks to the medium- term inflation outlook may necessitate appropriate action to anchor inflation expectations,” the bank said today.

The rand fell 0.6 percent to 10.1567 against the dollar as of 6:44 p.m. in Johannesburg.

Fed Tapering

Consumer prices, excluding food, non-alcoholic beverages, gasoline and energy costs, rose 5.3 percent in October from a year ago, according to the statistics office. The Reserve Bank estimates the core inflation rate will average 5.2 percent this year and peak at 5.6 percent in the fourth quarter of 2014.

“Core inflation is still trending upward from the lagged exchange rate effects and unit labor costs,” Chris Loewald, senior deputy head of research at the Reserve Bank, told economists and students in Pretoria today.

The risk to the exchange rate posed by the possible tapering of the U.S. Federal Reserve’s quantitative easing program is a “significant challenge,” according to the Reserve Bank.

“If inflation expectations are not anchored, or if the depreciation is significant over a sustained period, inflation could be expected to rise above the target band,” the Reserve Bank said. “This could require monetary policy reaction.”