South African Reserve Bank Retains Cyclically Low 5.5% Repo Rate as Expected

May 12, 2011

Six previous reductions totaling 500 basis points between December 2008 and August 2009 and a further three cuts of 50 basis points apiece in March, September and November 2010 slashed the South African repo rate from 12.0% to 5.5%, where such has stayed for the past six months.  Policy now lies in limbo. Growth isn’t fast enough to cut the enormous jobless rate of 25%, yet cost push inflation has spiked and is likely to lift the 12-month CPI rate of increase to 6.3% by the first quarter of 2012.  That would be above the 3-6% target and the current reading of 4.1%.  Whether inflation then settles back into target, the central bank’s baseline assumption, or remains too elevated will hinge on whether second-round effects kick in, and upwardly creeping expected inflation is an ominous sign. 

A statement today from officials promises to “monitor closely any indications of second round effects on inflation emanating from these cost pressures” and to respond in a timely way to signs that threaten to move inflation out of the target range on a sustained basis. In addition, the MPC will remain vigilant with respect to any inflation risks that could emanate from domestic demand developments.”  Officials expect South African GDP to expand less than 4% both this year and next, which is disappointing by emerging market standards.  A trade-weighted rand depreciation of about 1% since March is also unusual given the strength of other commodity currencies this year.

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



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