ECONOMIC TROUBLES TO PERSIST
No change as Reserve Bank governor Gill Marcus sees uphill battle
Rates held, forecast for growth cut AFTER five years of no growth and low growth the world faced hard times for another five to seven years, Reserve Bank governor Gill Marcus said yesterday. Responding to a question at a press conference after the meeting of the bank’s monetary policy committee (MPC), she added: “And that’s if things don’t get worse.”
In line with this view, the bank has revised its growth outlook for South Africa in the current year down from 2.7 percent to 2.6 percent, after earlier cutting from 2.9 percent.
And Marcus said: “Further risks are somewhat on the downside.”
Despite this gloomy forecast, Marcus said the Reserve Bank had decided to keep the bank’s repo rate on hold at 5 percent, after a half percentage point “pre-emptive” cut at the last MPC meeting in July. This means benchmark prime and mortgage rates will remain at 8.5 percent.
Marcus said in response to a question that the decision had been unanimous though a rate cut had been discussed.
However, given a deterioration in the bank’s inflation THE DECISION by the Reserve Bank monetary policy committee to keep the bank’s repo rate on hold came as data from China sounded a warning on global growth, supporting the case for lower interest rates.
Reuters reported China’s purchasing managers index (PMI) ticked up to 47.8 points in September from a nine-month low in August of 47.6, but remained below 50 for an 11th month in a row, showing the sector was still contracting.
And it said France added to the gloom with its PMI falling to a three-and-a-half-year low of 44.1 this month, from 48 in August.
Nedbank Capital said: “Weaker Chinese manufacturing PMI is weighing on commodity prices, including gold, on expectations for diminished outlook, due to higher-thanexpected petrol and food inflation, the MPC had opted to keep the repo rate on hold.
In the July MPC statement, Marcus said inflation would remain stable at about 5 percent to the end of 2014. The bank now expects inflation to average 5.3 percent in the final quarter of this year and 5.2 percent next year. At the previous three meetings Marcus revised the inflation forecast downwards demand from a key consumer.”
At the same time, falling oil prices yesterday removed some of the danger that inflation will once again breach the ceiling of the Reserve Bank’s 3 percent to 6 percent target range. South Africans have faced a series of petrol price increases in recent months as the oil price climbed. And there is currently a 23c a litre underrecovery, which points to a further increase.
Reuters reported that Brent crude prices moved below $108 (R887) a barrel yesterday.
And another major inflation driver shows signs of improvement, with indications that food inflation may be levelling off. Two weeks ago, the UN Food and Agricultural Organisation reported its food price index averaged 213 points last month, unchanged from July. after a series of betterthaninflation figures.
But rising food and oil prices reversed the trend last month, when inflation rose to 5 percent from 4.9 percent in July. The MPC decision was in line with market expectations.
Standard Bank analyst Bruce Donald noted that only one out of 20 analysts polled by Bloomberg expected the MPC to cut the repo rate today.
And forward rate agreements
“Although still high, the index value is 25 points below the peak of 238 reached in February last year and 18 points less than in August last year. International prices of cereals and oils/fats changed little but sugar prices fell sharply, compensating for rising meat and dairy prices.” – Ethel Hazelhurst (FRAs) – transactions that run for three months starting some time in the future – were pricing in just over a 20 percent chance of a half percentage point cut yesterday.
After the statement FRA signals became mixed as market players tried to decide whether the chances of a rate cut have increased or decreased.
Razia Khan, the head of Africa research at Standard Chartered, commented: “The Reserve Bank never operates in a vacuum and will take many factors into account.”
But rising household indebtedness, a pick-up in unsecured lending to households, and a worryingly high current account deficit could not be shrugged off entirely, she said.
The banks Quarterly Bulletin showed the deficit – the gap between earnings from exports of goods and services and the import bill – had risen from 4.9 percent in the first quarter to 6.4 percent in the second. The MPC estimated a 5.25 percent deficit for the year.
Marcus said: “The current account deficit has been financed mainly through portfolio inflows but could pose a risk to the exchange rate unless it moderates over the coming months.” A weaker rand would boost inflation – an additional incentive to keep the repo rate on hold.