South African Repo Rate Left at 7.0%

September 22, 2009

The rate decision of the South African Reserve Bank met analyst expectations for the first time in three tries.  The repo rate had been cut to 7.0% from 7.5% on August 13 instead of being kept steady as predicted, and such was not changed on June 25th when pundits were looking for a 50-bp cut.  No meeting was held in July.  Prior to June, four consecutive reductions of 100 basis points each were implemented on February 5, March 24, April 30 and May 24th.  An initial reduction of 50 basis points to 11.5% from 12.0% was announced last December 11th, so altogether the repo rate is 500 basis points below peak.

Today’s statement from the SARB projects economic recovery from the current economic quarter and in-target CPI inflation from 2Q10 through the 4Q11 end of the forecasting period.  Inflation forecasting risks are considered balanced.  The CPI target is a range of 3 – 6%.  While the on-year pace has surpassed the target ceiling since February 2007, August’s 6.4% was down from 6.7% in July and 13.4% in 07/08.  Producer prices fell 3.8% in the year to July. Rand appreciation continues to exert a significant disinflationary influence.  Against the dollar, the rand had risen more than 8% since the August policy meeting, some 27% since the end of 2008, and even around 10% from a year ago despite a sharp decline when the global financial crisis was most severe.  Monetary officials are now slightly more optimistic about inflation in 2011, and they observe somewhat lower expected inflation by others, although such remains above the target corridor.

South African GDP contracted in the final quarter of 2008 and in the first two quarters of 2009.  However, the rate of decline slowed during the second quarter of this year by half to 3.0% at an annualized rate and 2.8% from a year earlier.  Retail sales fell 3.9% in the year to July, down from a drop of 6.9% in the year to June.  Industrial production posted a monthly advance of 3.0% in July and fell 13.7% on year after drops of about 17% from a year earlier in June and May.  The jobless rate exceeded 20% at midyear, and deficits in the current account and public finances are somewhat above 5% and 4% of GDP, respectively.

The remaining interest rate announcements of 2009 will be made on October 22, November 17 and December 17.  If economic prospects evolve as officials expect, credit policy will likely remain on hold.

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


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