South African Reserve Bank Interest Rate Left at 5.75%

January 29, 2015

There were two central bank repurchase rate increases in 2014: a 50-basis point hike in January and a follow-up 25-bp increase to 5.75% in mid-July.  A released statement after the first scheduled policy meeting of 2015 adopts a wait-and-see attitude regarding how to respond to plunging oil prices that have significantly lowered the near-term projected trajectory of headline CPI inflation.

The near-term inflation outlook has therefore changed significantly, but the favorable impact of these developments on both inflation and growth in the longer term will depend on the persistence of the oil price decline. Even a moderate increase in oil prices going forward will reverse the favorable inflation trajectory, and the inflation and growth benefits, while welcome, are expected to be temporary. At the same time, the impact of load shedding and a deterioration of the global growth outlook are likely to offset some of the positive impacts of the lower petrol price on domestic growth.

For some time we have emphasized that we are in a process of interest rate normalization. The lower inflation path gives us some room to pause in this process, particularly against the backdrop of continued weakness in the economy. The MPC has therefore unanimously decided to keep the repurchase rate unchanged at 5,75 per cent per annum.

New forecasts from the South African Reserve Bank call for total inflation this year of 3.8% but a core inflation rate (5.5%) that lies still near the target ceiling.  South Africa has a number of imbalances besides comparatively high inflation.  Growth is projected to average 2.3% over the coming two years, and the current account deficit is hovering near 6% of GDP.  The rand had become more stable lately, but officials are under no illusion that selling pressure could resume in the current environment that favors the dollar over other major currencies.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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