South African Reserve Bank Keeps Repo Rate Target of 7.0%

October 22, 2009

As expected, the SARB did not cut or raise its target interest rate.  In making this decision, monetary policymakers replicated the action of their prior September meeting and released a statement that observed no marked changes in inflation risks since that previous meeting.  Prior to that, six reductions totaling 500 basis points were engineered between December 11, 2008 and August 13, 2009 from a cyclical peak of 12.0%. The 7.0% target rate level still exceeds on-year inflation.   South African monetary officials project a further deceleration of inflation ahead and sustained in-target inflation from the second quarter of next year through at least the end of 2011.  The economy remained in recession in 3Q.  GDP posted annualized and on-year declines of around 3.0% in this year’s second quarter, and industrial production in August was down 2.8% from July and 15% lower than a year earlier.  Central bank officials are hopeful that a recovery will emerge by the end of this year in light of better PMI readings but caution it will be “tentative” and associated with a large amount of resource slack for “some time.”  CPI inflation stood at 6.4% in August, down from 6.7% in July and 13.7% a year earlier, and PPI inflation is negative and still edging lower.  A strong rand, now some 26% above its year-ago level against the dollar, continues to exert a significant disinflationary force.  A press report today that authorities are considering establishment of a fixed rand peg to the dollar was denied by officials but nonetheless produced a setback in the currency on a day that other commodity-sensitive currencies have also declined.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.

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