MPC not united on repo decision

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Reuters

File picture: Siphiwe Sibeko

Johannesburg - The half a percentage point hike in January and a moderately stronger rand against the dollar gave the monetary policy committee (MPC) of the Reserve Bank room to manoeuvre and keep the benchmark repo rate steady at 5.5 percent yesterday.

The move was broadly expected by economists, and it is likely to provide some short-term relief to overburdened consumers, a month away from a general election.

The rand remained unchanged at R10.69 against the dollar yesterday soon after the announcement. It was bid at R10.6092 at 5pm.

However, the decision to hold rates steady was not unanimous, with a split of four in favour of keeping the interest rates on hold, and three arguing for a hike, governor Gill Marcus told journalists.

The split underscores the dilemma faced by the bank as it grapples with slow growth and the spectre of rising inflation.

South Africans must brace themselves for another repo rate hike soon, probably another 50 basis points at the bank’s next policy meeting on May 21 to 22.

Marcus indicated this when she said real interest rates were currently below what could be considered normal in the long run, and were likely to increase over the medium term. She said the bank had entered “an interest rate raising cycle”, her most explicit statement on the future direction of interest rates to date.

She said: “The pace of tightening will depend on a number of factors, including projected inflation, inflation expectations, the state of the economy and global developments.“

Sizwe Nxedlana, the chief economist at First National Bank (FNB), said despite the central bank’s decision not to raise rates, they had one direction to go and that was up.

“A minor silver lining may be that with growth in credit extension and government spending slowing, the magnitude of interest rate increases may not be as much as in previous rate-hiking cycles,” he said.

In broad terms, Marcus painted a picture of an economy facing the prospect of stagflation: a toxic mix of slowing growth and rising prices.

Marcus said the domestic economic outlook remained subdued amid continued strikes in the platinum sector and uncertainty regarding stable and sufficient electricity supply in the coming months.

“The bank’s forecast for economic growth has declined marginally to 2.6 percent in 2014, compared with 2.8 percent previously,” Marcus said, adding that the bank was now forecasting growth of 3.1 percent for next year, down from a prior estimate of 3.3 percent.

Moreover, the Reserve Bank remains anxious about inflation breaching the upper end of the 3 percent to 6 percent target range. Marcus said the bank expected this to happen in the second quarter, and inflation to return to within the target range in the second quarter of next year, when it was expected to measure 5.9 percent.

Marcus said: “While the most recent inflation forecasts suggest marginal improvements in the medium term, upside risks to the inflation outlook persist despite the recent appreciation of the rand, which remains vulnerable to shifts in global risk sentiment and adverse domestic developments. Together with downside risks to growth, this continues to pose a dilemma for monetary policy.“

Consumer inflation edged up to 5.9 percent last month from 5.8 percent in January.

Marcus said the bank’s forecast for headline inflation was unchanged this year. It was expected to average 6.3 percent, with a peak of 6.6 percent still expected in the fourth quarter.

The forecast average inflation for next year declined from 6 percent previously to 5.8 percent, with inflation expected to average 5.6 percent in the final quarter of that year, compared with 5.9 percent previously.

Marcus said: “This improvement is mainly the result of the lagged effect of the repo rate increase. Inflation is still expected to breach the upper end of the target range in the second quarter of 2014, and to return to within the target range in the second quarter of 2015, when it is expected to measure 5.9 percent.”

She said the exchange rate of the rand had been relatively volatile since the January MPC meeting, having fluctuated in a wide range between R11.39 and R10.60 against the dollar. “There has been an appreciating trend… in line with an improving risk sentiment towards emerging markets,” she said.

Marcus said that while the risk to the inflation outlook from the exchange rate might have moderated since the previous MPC meeting, these risks were still assessed to be on the upside and the MPC believed the exchange rate would continue to be highly sensitive. - Business Report


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