Gill Marcus, the governor of the Reserve Bank, made a sudden announcement yesterday that she was not available for re-appointment and rendered her swansong by keeping the repo rate at 5.75 percent.
Marcus said the domestic growth outlook remained weak, following a contraction of 0.6 percent in the first quarter and growth of 0.6 percent in the second quarter. She said this pace was well below potential output and was indicative of a widening output gap.
“Partly as a result of this outcome, as well as the expected impact of the metal workers’ strike in July, the bank’s forecast for gross domestic product growth for 2014 has been revised down further to 1.5 percent, from 1.7 percent previously, with the risks still assessed to be on the downside,” Marcus said.
The forecasts for 2015 and 2016 were revised down 0.1 percentage point to 2.8 percent and 3.1 percent, respectively.
She said that despite the slight near-term improvement in the inflation outlook and relatively stable expectations, the bank’s monetary policy committee (MPC) was concerned the forecast (6.2 percent for this year, and 6.1 percent and 6 percent for next year and 2016, respectively) remained uncomfortably close to the upper end the target band of 3 percent to 6 percent.
“While inflation is the primary focus of the committee, the MPC is also mindful of the anaemic state of the domestic economy, rising unemployment and the downside risk to its growth forecast.”
Marcus said domestic sector expenditure had deteriorated, particularly private sector fixed capital formation. This, together with continued moderation in household consumption, was indicative of the lack of demand pressures.
The MPC calculated that keeping the repo rate steady would probably buy time for the economy before it had to deal with inflationary pressures by hiking again.
Peter Attard-Montalto, an emerging market economist at Nomura in London, said: “A cautious MPC judges that it has more time to play with and so we think this is the end of the first half of the cycle – the fine-tuning phase. The second half may start in November if inflation and Federal Reserve views shift enough, but January now seems more likely to us.”
Analysts at Econometrix noted that Marcus had reiterated that the Reserve Bank was in a rising interest rate cycle.
However, the risk was that by not increasing rates now, the bank might have made it more difficult to prevent a much steeper increase in interest rates at a future date.
The rates decision was eclipsed by Marcus’s announcement that she would be leaving her post. Leading economists have praised her for her sterling leadership at the central bank and for guiding the economy through five years of post-financial crisis turmoil.
Marcus said she would not be available for re-appointment on November 8, when her five-year term expired. Her predecessors, Tito Mboweni and Chris Stals, both served two terms.
She said this MPC meeting was her last. She was confident President Jacob Zuma would be able to draw on a “strong talent pool” in the Reserve Bank, suggesting she would prefer an internal replacement.
Zuma issued a statement just hours after Marcus’s announcement, in which he extended his gratitude and that of government to her.
“We wish to thank the governor for her excellent service and leadership. She has steered the bank during difficult periods of global economic and financial recession, and ensured the achievement and maintenance of stability. We value the governor’s contribution immensely,” he said.
Marcus was deputy governor in Mboweni’s first term but quit because of alleged policy differences between the two.
Marcus, as governor, blamed South Africa’s below-potential economic growth on structural problems.
“Many of the problems the country faces are not part of the bank’s mandate, nor does the bank have the policy levers to address these issues,” she said in July.
Goolam Ballim, the chief economist at Standard Bank, said her sudden announcement did not look suspicious.
“There were already suggestions in the market. The governor leaves behind a capable MPC. She was not one who is dominant and autocratic, and her departure is not to be construed as a potential risk by the markets,” he said.
Dennis Dykes, the chief economist at Nedbank, said Marcus was a good governor who was good at communicating what the bank was doing.
He said the bank had three very capable deputy governors. “It is important there is continuity and someone is not parachuted in.”
Gina Schoeman, an economist at Citi, said: “We believe that current deputy governor Lesetja Kganyago is the most likely candidate.”
Attard-Montalto said: “We had initially expected her term to be renewed for a year or two but that may not have been acceptable to either side. We think increasing political pressure, as well as her time in public life, may be part of the reason she did not want to continue.”
He added: “Since November of last year in particular, but in private for longer, she has increasingly been prepared to bang the table on the issues that needed addressing.”
Kganyago has been a deputy governor since 2011 and served as deputy director-general of the National Treasury from 2004 to 2001.
Schoeman said the appointment would be decided by both Zuma and Finance Minister Nhlanhla Nene and Kganyago had worked with Nene for many years. “Kganyago is well respected by markets and [is] seen to be on the hawkish side of monetary policy.”