South Africa's Central Bank: Power prices will return to 3% inflation.

South Africa's Central Bank said on Thursday the underlying inflation is well contained but that unexpectedly higher electricity prices will mean a slower recovery to its new 3% goal.

The central bank, in a review of its monetary policies every two years, said that the outlook for electricity prices had worsened during the past six months. It now expects it to average 7,9% on a medium-term basis, up from 6,6% in April.

The overall inflation rate was much lower at 3.4% in December, after being close to 3% for most of the year.

In its policy review, the South African Reserve Bank (SARB), said that increases in administered prices such as power and water are "becoming more difficult to justify" and called for urgent policy changes to align these price increases with the broader trends in prices in the economy.

In an effort to "lock-in" low inflation, the government announced that it would target 3% inflation rather than its formal target range of 3%-6% in July.

The Bank expects inflation to rise from 3.4% to 3.6% this year, then to 3.1% by 2027.

It said that "the slower return to the target is due in large part to an unexpectedly high inflation of electricity prices."

SARB predicts that inflation expectations will drop from above 4% to around 3% in 2027. This is influenced by low inflation over the last year, and the SARB's stated preference for a target of 3%.

The policy meeting held next month did not include any indication of whether the rate cut would be resumed. Instead, it stated that market expectations are for no more easing.

The SARB delivered three rate reductions this year but paused during its meeting in September.

(source: Reuters)