Economists react to rate decision

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Johannesburg - South Africa's Reserve Bank left the repo rate unchanged at 5.0 percent on Wednesday as expected, saying the inflation outlook had deteriorated, although risks to domestic economic growth were on the downside.

All 21 economists polled by Reuters last week saw the rate holding steady, with a large majority seeing rates unchanged for the rest of the year.

 

ANALYST COMMENTS

ANISHA ARORA, EMERGING MARKET ANALYST, 4CAST LIMITED

“We had expected a neutral-hawkish stance, and that is what we got, especially as it was said the moderate pace of recovery should continue.

“It is still a difficult balancing act for the MPC, but their mandate is to maintain price stability, thus the significant number of upside inflation risks leaves room for policy manoeuvre almost non existent.

“We see rates on hold until the end of the year, with a possibility of returning to a rate hike cycle mid 2014.”

 

CHRIS BECKER, MARKET ANALYST, ETM

“They've revised their price inflation forecasts higher. We've been expecting this but we also anticipated they are going to talk down the duration and the extent of the inflation up cycle because growth is slowing at this stage, just to keep interest rates flat.

“So we think we're in a stagflationary environment and the SARB has to balance both of these counter trends off against one another.

“CPI could accelerate quite rapidly. It could breach the SARB forecast of 6.3 percent. It could reach levels of 7 percent by early next year. If we're right on this, then interest rates would have to go up, or at least the market will be pricing it in towards the middle of next year.

“If the rand also goes much higher than where it is, it also starts to bring rate hikes back into the picture.”

 

ELNA MOOLMAN, ECONOMIST, RENAISSANCE CAPITAL

“The decision and the outlook does not surprise us at all. We were of the opinion that upside inflation risks will prevent a cut, and at the same time, economic growth is likely to remain too weak to be considering rates hikes anytime soon.

“It is very clear the Reserve Bank is very concerned about growth prospects. It labels it as being still fragile and specifically talks about the possibility that consumer growth will continue to moderate. In that scenario, interest rate hikes are just not possible.”

 

SALOMI ODENDAAL, ECONOMIST, CITADEL

“One of the important things coming out of the speech is the Reserve Bank being concerned about growth in South Africa within the global context. They generally mentioned that the risks that they see are relatively to the downside as households are still struggling.

“We don't expect interest rates to change in the foreseeable future because although inflation is slightly higher and there are some risks like the weak rand and wage increases, on the other hand economic activity is still fairly weak.”

 

KEVIN LINGS, CHIEF ECONOMIST, STANLIB

“It's the right decision, obviously the inflation risks have increased.

“It's fairly clear that inflation will breach the upper end of the targeted range for some period this year.

“Keeping rates on hold is probably the best response right now. Hopefully some of those pressures moderate. But it's going to depend quite a lot on how the currency plays out.”

 

ADENAAN HARDIEN, ECONOMIST, CADIZ ASSET MANAGEMENT

“Given recent news on inflation, I'd have expected the MPC statement to be more hawkish.

“Certainly, we think that the upside risks to inflation are quite serious. In this respect, the rand, wages and food prices are bugbears to watch.

“We thus remain of the view that there is little prospect for further rate cuts. Our view remains that the next move in rates will be up, but we maintain that a hike will be delayed until the end of 2014 at the earliest.”

 

MARKET REACTION

The rand was weaker at 9.2530 to the dollar by 13:19 SA time from 9.2280 beforehand.

The yield on the 2026 bond edged down half a basis point to 7.475 percent while that for the 2015 bond rose one basis point to 5.485 percent. - Reuters