ECO N O M Y Bank’s hands are tied
With growth slowing and inflation rising, the Reserve Bank’s options are limited
The room for the Reserve Bank to cut rates to stimulate the economy has shrunk to almost nothing as SA finds itself in the grip of stagflation, between rising inflation and dwindling growth.
Until recently, the odds of a further cut in interest rates over the next 12 months appeared better than even, but at the November monetary policy committee (MPC) meeting it was clear that the straitjacket of stagflation had tightened around the Bank.
Stagflation occurs when an economy isn’t growing and unemployment remains steadily high but inflation is rising. This is the situation that SA is in now.
Between the September and November MPC meetings, SA experienced a “marked change”, Bank governor Gill Marcus noted in the November MPC statement. She was referring to the widespread labour market instability that has caused SA’s economic growth outlook and confidence to deteriorate.
As a result, the Bank has revised down its growth forecast for 2012 to 2,5% (previously 2,6%) and expects an even bigger drop in 2013 to 2,9% (from 3,4% previously).
Moreover, the Bank says the risks to this forecast remain on the downside. It notes in the same MPC statement that “these domestic developments, if not addressed in a comprehensive and constructive manner, have the potential to derail the progress made to date whereby SA has been able to withstand the worst contagion effects of the ongoing global crisis”.
Since then, SA’s thirdquarter GDP data has been released, confirming expectations that the economy is stalling, mostly as a result of the mining strikes. Real GDP grew at an annual rate of 1,2% quarter on quarter (seasonally adjusted and annualised), dragged down by a > SA in grip of
stagflation > Marcus facing first
real test 12,7% contraction in mining output. It remains doubtful whether SA’s fourthquarter growth performance will be much better.
But even as the Bank has had to revise down its growth forecasts it has had to revise up its inflation outlook. It now expects consumer price inflation to peak at 5,7% in the first quarter of 2013 and to average 5,5% for 2013 as a whole compared with 5,2% previously.
This deterioration is mainly due to higher than expected food price inflation (6,7% year on year) as well as the recent depreciation of the rand.
The risks to this higher inflation outlook are also tilted to the upside, according to the MPC, given the continued pressure on food prices, uncertainty over the rand and technical changes to the consumer price index.
“Furthermore, the possible impact of higher wage increases could exert further upward pressure on inflation, notwithstanding the concerns that recent developments in the labour market could impact negatively on employment,” the MPC warns.
The situation amounts to “the first real test” of Marcus, says Nomura strategist Peter Montalto. He feels that until now inflation has been low enough, with more balanced risks, to allow the Bank to credibly cut rates based on growth concerns. But with inflation threatening to breach the target band next year, the choices facing the Bank have become much more finely balanced.
How the Bank responds will reveal whether it places a
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