South Africa Moves Closer to its First Rate Hike

March 24, 2011

The South African Reserve Bank (SARB) left its repo rate unchanged at 5.5% as expected but released a more hawkish statement.  Officials after the prior meeting in January had indicated their expectation of a stable policy stance “for some time.”  No such assurance was made this time.  Instead, the statement today just says a decision was made to keep a 5.5% interest rate “for the time being” and concludes, “given the significant upside risks to the inflation outlook, the MPC will closely monitor any indications of second round effects on inflation emanating from these cost pressures.”  Thus far, evidence of demand-pull strains on inflation haven’t appeared, but domestic growth has improved, and the overall recovery looks more sustainable.  The rand is no longer appreciating, having eased 1% in trade-weighted terms since the prior meeting in January, and officials revised their inflation forecasts up a shade to 4.7% this year and 5.7% in 2012.

The SARB had cut its key interest rate as recently as November 10, 2010.  In fact, three cuts were implemented during 2010, each by 50 basis points.  From 12% prior to December 2008, the repo rate had been previously reduced six times beginning that month and running through August 2009 by a total of 500 basis points.  With policy now seemingly past an inflection point, the next rate change is likely to be upward, perhaps as soon as the next policy meeting scheduled for May 12.  In central bank-speak, the expression “for the time being” conveys that an increase as soon as May, although not impossible, is not the most probable outcome, either.  Subsequent meetings are scheduled for July 21, September 22, and November 10, 2011.

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



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