South African Reserve Bank Holds Rates

The Reserve Bank’s Monetary Policy Committee [“MPC”] voted unanimously to keep the “repo rate”, South Africa’s benchmark interest rate, unchanged at 6.00%. Governor, Lesetja Kganyago, pointed out that the MPC had to achieve a “fine balance” between its core mandate of price stability and not unduly undermining short-term growth. He indicated that risks to the global economic outlook had increased against the backdrop of a slowing Chinese economy and that capital outflows from emerging markets had resulted in heightened financial market volatility. The outlook for inflation has changed “marginally”. The Reserve Bank expects near term improvement, but slight medium term deterioration. Inflation is expected to breach the 6% upper limit of the Bank’s target range in the first and fourth quarters of 2016 before beginning a “slow downward trend” in 2017. The rand exchange rate remains an upside risk to the inflation outlook.

South Africa’s domestic growth outlook has deteriorated following the surprise contraction in the 2nd quarter of this year (- 1.3% annualised). Although the MPC believes that further contraction in the 3rd quarter is unlikely, the outlook remains relatively weak amid declining business and consumer confidence. The Bank has revised its forecast for growth down by 0.5% points in each of its forecast periods. Growth is particularly disappointing in the goods-producing sectors of the economy, with contractions in agriculture, mining and manufacturing. The agricultural sector remains constrained by drought (see our piece on El-Nino here) while mining is being affected by the decline in commodity prices, lower global demand and the risks of industrial action (find some data on strikes in last week’s piece here). The decline in Barclays’ August PMI to below 50 (PMI = purchasing managers index: >50 = expansion, < 50 = contraction) and a further decline in capacity utilisation suggest a challenging outlook.

Consumers are expected to remain constrained by slow employment growth, declining disposable income growth and rising inflation. Credit extension to households remains negative in real terms and is expected to be impacted further by the tighter affordability criteria following amendments to National Credit Regulations.

The inflation outlook is a key concern to the Reserve Bank, with risks weighted towards higher inflation. The MPC’s interest rate policy remains on a “gradual normalisation path”. So far the Reserve Bank has raised interest rates 1.00% points since January last year. According to Business Day, Barclays expects a further 0.25% points hike in November for a total increase of 0.75% points this year. You can find the full Reserve Bank statement here.

(Sources: South African Reserve Bank, Business Day) 

DR ANDREW LOUW CFA

NewsAndrew LouwComment