South African Repurchase Rate Kept at 6.5%

July 22, 2010

The unchanged monetary policy setting announced by the South African Reserve Bank was the result expected by a majority of analysts and matched the outcome of the prior policy meeting in May.  Inflation risks are considered balanced.  Cost-push upward forces from high recent wage awards and elevated administered prices counter-balance downside demand-pull pressures associated with a negative output gap.  CPI inflation is at a four-year low of 4.6%, down from 4.8% in April, 5.1% in May, 6.3% at end-2009 and 8.5% in March 2009.  In-target inflation is projected for the entire forecast period including 5.3% at the end of 2012.  Following South Africa’s first recession in 17 years, real GDP rose at annualized rates of 3.2% in 4Q09 and 4.6% in the first quarter of this year but was only 1.6% higher than in the first quarter of 2009.  To promote growth and consistent with falling inflation, the central bank reduced its benchmark rate starting in December 2008 four times by 100 basis points and three times by 50 basis points, a total decrease of 550 bps from a cyclical high of 12.0%.

today’s statement from officials call present policy settings “appropriate,”  the domestic economy is still considered fragile and vulnerable.  That suggests that a slightly greater bias exists to cut rates than to raise them.  The last reduction in March of this year, a drop of 50 bps, was influenced by strong rand appreciation in the lead-up to that meeting.  The rand, by contrast, has been volatile but trendless since early June.  It’s future performance could be pivotal in deciding whether the 6.5% repo rate is a cyclical floor or whether the rate gets reduced further.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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