South African Reserve Bank Keeps Policy Stance Paused

March 26, 2015

It doesn’t happen often that a central bank raises projected and above-target inflation for the coming two years yet leaves its policy interest rate unchanged.  Yet that is what the South African Reserve Bank just did.  Inflation is forecast at 4.8% in 2015 (a whole percentage point higher than the previous estimate) and an average of 5.9% in 2016, revised from 5.4%.  The peak should happen about a year from now in the vicinity of 6.7%, officials now believe.  The revisions reflect the recent bounce of oil prices, special factors specific to food, rand depreciation, and wage pressure.  South Africa’s exchange rate is particularly vulnerable against Fed tightening and South Africa’s chronic current account deficit.  The quandary of officials is that economic growth also got revised adversely, that is downward.   So the statement sums the decision up as follows:

In its previous statement the Committee noted that the more favorable inflation path allowed for some room to pause in the process of domestic monetary policy normalization. The deterioration in the outlook suggests that this scope has narrowed. However, given the uncertainties related to US policy normalization and the weak state of the domestic economy, the MPC has unanimously decided to keep the repurchase rate unchanged for now.

Between December 2008 and July 2012, the central bank’s repo rate had been slashed from 12.0% to 5.0%.  That easing trend ended last year when officials raised the rate initially by 50 basis points in January and by an additional 25 bps to 5.75% six months later.  But eight more months have now passed and seen setbacks in the quest for inflation containment.  It’s getting harder to justify a 5.75% interest rate when the forecast anticipates inflation cresting a full percentage point higher than that level.

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

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