Central bank heralds early Christmas
Repo rate steady as rand slide comes to halt
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.