The increasingly difficult dilemma facing the monetary policy committee (MPC) of rising inflation and slowing growth led to the decision to hike the repo rate by 25 basis points, Reserve Bank governor Gill Marcus said yesterday.
However, she said she did not think the economy was in a recession yet.
Marcus said six members had voted for a hike, with one voting for 50 basis points, while one had voted for a hold.
The rand weakened against the dollar yesterday, as news that a Malaysian plane had been shot down in Ukraine heightened geopolitical tensions, erasing earlier gains after the bank raised interest rates, Reuters reported.
At 5pm the rand was bid at R10.6606 to the dollar, pulling away from a best level of R10.645 hit after the rate hike.
Marcus said the marginal improvement in the bank’s forecast of headline inflation at the previous MPC meeting had been more or less reversed, as recent food price developments surprised on the upside.
Inflation was expected to average 6.3 percent this year, she said, compared with 6.2 percent previously, with the quarterly peak of 6.6 percent (previously 6.5 percent) still expected in the third quarter.
Marcus said the forecast average inflation for next year increased to 5.9 percent from 5.8 percent, while the forecast for 2016 increased marginally to 5.6 percent and to 5.5 percent in the final quarter of that year.
Inflation was still expected to return to below the 6 percent ceiling of the target band during the second quarter of next year, provided there were no further shocks to the system, particularly from Eskom being granted possible higher tariff increases from next year.
The Nedbank Economic Unit said the MPC again reiterated that rates were in a rising cycle and that at some point they would have to be “normalised”.
“The implication is that the MPC will continue to talk tough, but act as moderately as possible. The next hike will again be 0.25 percentage points and will probably be in November. Our year-end forecast for the repo rate therefore remains at 6 percent, with a further rise to 7 percent in the second half of 2015 when genuine interest rate hikes abroad force similar moves here,” it said.
Marcus said the country’s growth outlook had deteriorated since the previous MPC meeting, compounded by continued labour disruptions.
Following a contraction of 0.6 percent in the first quarter, the outlook for the second quarter was expected to be positive, but subdued, particularly in the light of weak mining and manufacturing data in May.
The Reserve Bank’s latest forecast, which assumes a speedy resolution of the current metalworkers’ strike, sees growth this year at 1.7 percent, compared with 2.1 percent previously and 2.8 percent forecast at the beginning of the year.
Peter Attard Montalto, a research analyst at Nomura in London, said: “The MPC statement was littered with keywords that suggest increased hawkishness since the last meeting. Overall, the framing of the inflation view was still very much focused on forecast risk skew and ‘fear’ as opposed to necessarily a significantly bad base line of forecast.”
Kamilla Kaplan, an economist at Investec, said future inflation considerations and global monetary policy normalisation overshadowed concerns over the slowdown in economic growth for the MPC.
“The decision to raise interest rates amid a deteriorating economic growth outlook suggests the Reserve Bank took the opportunity before the publication of the second-quarter gross domestic product data to continue its moderate rate cycle. Judging by the worsening performance of economic indicators, the economy may have registered a contraction.”