Cen­tral bank her­alds early Christ­mas

Repo rate steady as rand slide comes to halt

The Star Early Edition - - BUSINESS REPORT - Wise­man Khuzwayo

THE SA Re­serve Bank kept its bench­mark repo rate steady at 5.75 per­cent yes­ter­day, in line with con­sen­sus forecasts, after the rand halted its re­cent slide and oil prices pulled back, help­ing to dampen in­fla­tion­ary pres­sures.

Le­setja Kganyago, the new Re­serve Bank gov­er­nor, said the decision of the mon­e­tary pol­icy com­mit­tee (MPC) to keep rates steady was unan­i­mous, and the bank had taken the slug­gish state of the do­mes­tic econ­omy into con­sid­er­a­tion.

In the run-up to the fes­tive sea­son, news that rates are on hold may present a bit of pos­i­tive news for con­sumers be­cause many of them are be­ing squeezed by ris­ing costs, limited ac­cess to credit and high lev­els of debt.

“The do­mes­tic growth out­look re­mains chal­leng­ing, but after two quarters dom­i­nated by the fall­out from ex­tended strikes, some re­cov­ery is ex­pected, but de­mand re­mains sub­dued,” Kganyago said.

“Con­sump­tion ex­pen­di­ture by house­holds has re­mained rel­a­tively sub­dued, but there are signs of a mod­er­ate in­crease in the quar­terly growth rate, as the neg­a­tive ef­fects of the pro­tracted strikes on con­sump­tion dis­si­pate. Con­sump­tion ex­pen­di­ture could be pos­i­tively im­pacted by lower petrol prices.”

In­ter­na­tional oil prices have de­clined markedly since their re­cent peak in June of around $115 (R1 270) per bar­rel to cur­rent lev­els of be­low $80.

Although some of the ad- van­tage of lower in­ter­na­tional oil prices had been off­set to some ex­tent by a weaker rand ex­change rate, do­mes­tic petrol prices had de­clined by a cu­mu­la­tive R1.17 per litre since Au­gust, Kganyago said.

And should cur­rent trends con­tinue, a fur­ther de­cline of around 70 cents per litre could be ex­pected in De­cem­ber, he added.

He said the tim­ing of fu­ture in­ter­est rate in­creases would de­pend on a range of fac­tors, in­clud­ing the evo­lu­tion of in­fla­tion ex­pec­ta­tions, the speed of nor­mal­i­sa­tion of mon­e­tary pol­icy in the US and the state of the do­mes­tic econ­omy.

The US cen­tral bank has kept its short-term in­ter­est rate near zero since De­cem­ber 2008. Most econ­o­mists ex­pect the first in­crease in mid-2015. The lo­cal cur­rency firmed to R10.9581 against the dol­lar at 6pm yes­ter­day, fol­low­ing the bank’s an­nounce­ment.

But Kganyago said the rand was ex­pected to re­main sus­cep­ti­ble to sud­den shifts in senti- ment re­gard­ing changes in mon­e­tary pol­icy stances in the ad­vanced economies, and the con­tin­ued un­cer­tainty re­gard­ing the ex­tent to which US nor­mal­i­sa­tion had al­ready been priced in to the ex­change rate. Nor­mal­i­sa­tion is mar­ket speak, mean­ing that rates will have to rise over time.

He said the per­sis­tently slow adjustment of the cur­rent ac­count deficit also made the rand vul­ner­a­ble to swings in sen­ti­ment that raised con­cerns about the fi­nanc­ing of the deficit.

Although lower oil prices should re­duce the oil im­port bill, its pos­i­tive im­pact on the deficit may be limited by fur­ther de­clines in other com­modi­ties. South Africa’s cur­rent ac­count deficit widened to 6.2 per­cent of gross do­mes­tic prod­uct in the sec­ond quar­ter from 4.5 per­cent in the first quar­ter.

Kamilla Ka­plan, an economist at In­vestec, said: “The ef­fects of di­ver­gent ad­vanced econ­omy mon­e­tary poli­cies and in par­tic­u­lar, the US Fed­eral Re­serve’s pol­icy tran­si­tion, are bound to con­tinue in­duc­ing for­eign ex­change mar­ket vo­latil­ity. Global in­ter­est rate ex­pec­ta­tions have re­cently been pared back.”

She said slower global eco­nomic growth, cou­pled with con­cerns sur­round­ing dis­in­fla­tion risks, had served to heighten mar­ket ex­pec­ta­tions of ad­vanced econ­omy mon­e­tary pol­icy ac­com­mo­da­tion re­main­ing in place for longer.

Kganyago said the MPC had as­sessed the risk to the head­line in­fla­tion fore­cast to be broadly bal­anced. Head­line in- fla­tion for Oc­to­ber came in at 5.9 per­cent on Wed­nes­day, the same as in Septem­ber. This was from 6.4 per­cent in Au­gust.

Kganyago, who of­fi­cially took over the reins at the bank on Novem­ber 8 from Gill Mar­cus, said since the pre­vi­ous MPC meet­ing, the sharp de­cline in in­ter­na­tional oil prices had con­trib­uted to a more be­nign global in­fla­tion en­vi­ron­ment.

“Lower oil prices have also had a favourable im­pact on do­mes­tic head­line in­fla­tion, with the medium-term fore­cast im­prov­ing rel­a­tive to the pre­vi­ous fore­cast. How­ever, the un­der­ly­ing in­fla­tion pres­sures, as re­flected in core in­fla­tion, per­sist.”

Core in­fla­tion, which ex­cludes food, elec­tric­ity and petrol prices, marginally rose to an an­nual 5.7 per­cent in Oc­to­ber from 5.6 per­cent in Septem­ber.

Look­ing ahead, Kganyago said: “The com­ing quarters are ex­pected to see an im­proved per­for­mance in the min­ing and man­u­fac­tur­ing sec­tors, but the out­look is in­hib­ited by do­mes­tic struc­tural con­straints, as well as by a weak global econ­omy and the con­tin­ued de­clin­ing trend in non-oil com­mod­ity prices.”

Ned­bank said the MPC state­ment was al­ways go­ing to be scru­ti­nised for changes with the ar­rival of Kganyago.

“In the event of the tone of the state­ment and rea­son­ing be­hind the decision was fa­mil­iar and showed a com­fort­ing de­gree of con­ti­nu­ity. The decision to de­lay the ‘nor­mal­i­sa­tion’ of in­ter­est rates was prob­a­bly the cor­rect one, given the col­lapse in the oil price and the slight-firm­ing in the tradeweighted rand.”

Kganyago said hav­ing reached a peak of 6.5 per­cent in the sec­ond quar­ter, in­fla­tion was ex­pected to av­er­age 5.9 per­cent in the fi­nal quar­ter, and an av­er­age 6.1 per­cent for the year, com­pared with 6.2 per­cent pre­vi­ously.

Even so, “the com­mit­tee re­mains of the view that in­ter­est rates will have to nor­malise over time”, he said.


Re­serve Bank gov­er­nor Le­setja Kganyago says the repo rate will re­main un­changed.

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