South African Credit Policy Left as It Was

July 21, 2011

As widely expected, officials at the South African Reserve Bank (SARB) retained their 5.5% repo rate level, which is a cyclical low.  Three additional reductions last year of 50 basis points each in March, September and November followed 500 bps of ease implemented from December 2008 to August 2009.  The central bank rate remains 650 basis points lower than its pre-December 2008 level of 12.0%.

While acknowledging a worse global economic outlook and a fragile recovery of South African domestic demand, today’s statement from SARB strikes a hawkish note, unlike the Turkish monetary policy statement reviewed in the previous update.  For one thing, South African monetary authorities revised projected CPI inflation higher and indeed into above-target territory.  The target is 3-6%.  CPI inflation has climbed recently from 3.7% in February to 5.0% as of June.  Officials now predict that such will slightly exceed 6.0% late this year, crest at 6.3% in 1Q12, and not regain a 5-handle until very late next year.  In 4Q13, they expect such to still be around 5.6%.  While expected inflation has remain pretty well-anchored, officials are watching such measures very closely, and the statement employs language similar to the ECB’s in asserting a steadfast commitment to future price stability.

It is however recognized that should there be unexpectedly high inflation outcomes, particularly with respect to underlying inflation trends, this could impact negatively on inflation expectations, which to date appear to be relatively well anchored. For this reason the MPC is not complacent and will remain vigilant and continue to monitor closely any indications of second round effects on inflation emanating from these cost pressures as well as the changing risk profile of the inflation outlook.

Officials do not explicitly say why rates weren’t raised now.  Such language by the ECB in conjunction with upwardly revised price forecasts would have been sufficient to warrant tightening even if price expectations were still contained.  South African officials seem to be hedging their bets because of the rand’s strength, heightened global risks, and concerns about domestic demand.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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