SARB Surprise!

The South Africa Reserve Bank [“SARB”] decided at its Monetary Policy Committee [“MPC”] meeting yesterday to raise its benchmark repurchase [“repo”] rate by 25 basis points to 6.25% per year. The vote was 4 to 2 in favour of a rate rise, with two members preferring an unchanged stance. Governor, Lesetja Kganyago, once again highlighted the difficulty that the MPC faces in balancing its core mandate of achieving price stability with not unduly undermining short-term growth. He also said that the MPC still views interest rates as “accommodative”.

Overall, the MPC’s inflation forecast remains unchanged, with a slight improvement (see table) in the near term inflation forecast, and a slight deterioration in the medium term forecast. The expectations are still for a breach of the 6% inflation upper limit in 2016 with declining inflation in 2017. The MPC also says that risks to its forecast have increased. The key inflation risks in South Africa are a marked depreciation of the rand; worsening drought conditions and their effect on food prices; and potential electricity price hikes (Eskom is trying to claw back R22.8bn of expenditure).

Prospects for growth remain poor. The Bank does not think that the economy contracted further in the 3rd quarter, but it has revised down its growth forecasts for 2015 and 2016 marginally to 1.4% and 1.5% respectively. The manufacturing sector had a surprising rebound in Q3 (although the outlook remains poor), while mining and agriculture are expected to contract further. The private sector continues to shed jobs and although there was an overall increase in the number of people employed in Q3, a larger increase in the number of people looking for jobs meant that the unemployment rate went up to 25.5%. Low consumer confidence, declining growth in disposable income and unemployment means that household expenditure and retail sales are down, while durable good sales remain under pressure (motor vehicle sales continue to decline). Unsecured lending by banks remains subdued and is likely to decline further due to interest rate caps announced by the DTI. The low oil price is providing the economy with slight tail winds and further petrol price drops are expected.

The MPC raised rates because it felt that “failure to act could cause inflation expectations to become unanchored and generate second round effects and more generalised inflation”. The MPC felt that, despite the relative stability in core inflation, acting now may allow it to avoid an even more disruptive policy response in the future. 

Brave move Mr Kganyago

The South Africa economy contracted by 1.3% (on an annualised basis) in the 2nd quarter of 2015 and although the MPC doesn’t expect a contraction in the 3rd quarter (it didn’t expect one in the 2nd) its easy to see why 1/3 of the MPC members voted against a rate rise. The market consensus was against it and the move has not been popular with the property sector and lenders who now fear that consumers could default on loan payments.

The Business Day in an editorial supported the move saying that it would “underline the credibility and consistency of South African monetary policy at a vulnerable time for the (rand)”. However Citadel Investment, in an interview with Bloomberg, complained that “we follow blindly what (the US does) and our economy is not as strong as theirs”, while Nedbank said that the move left no doubt that SARB “intends hiking interest rates at the expense of growth”.

It does feel to me that the Reserve Bank is focused on managing the currency and looking to pre-empt the EM FX volatility around next month’s expected US rates rise. If you’re concerned about the rand, then that policy should make you happy. The rand has lost almost 20% of its value against the dollar this year and hit a record low of 14.4410 earlier this week. Following the MPC decision the currency has recovered to below 14.0 to the dollar. On the other hand, as MPC voter Brian Khan pointed out, a 25 basis point increase in interest rates can be expected to slow GDP growth by 0.1%.

Good luck Mr Kganyago, the South African certainly economy needs it. 

(Business Day, Bloomberg, South African Reserve Bank) 

Opinion, NewsAndrew LouwComment