South African Reserve Bank: Policy Remains on Pause
November 10, 2011
South Africa’s benchmark interest rate was last changed a year ago when a 50-basis point reduction to 5.5% culminated a nine-step 650-bp point easing of monetary policy. A new statement today from monetary authorities revised projected inflation somewhat upward but said that the weaker domestic economic growth in 2Q11 persisted in 3Q and that downward revisions to economic growth in 2012-13 were indicated as well as that to growth this year. Officials believe that inflation will exceed its 3-6% target in 4Q11 and part of 2012, but they blame the overshoot on temporary factors and predict a return to target by late 2012 without need for additional monetary restraint. Officials are watching the European debt crisis with fingers crossed, but they are also monitoring core inflation closely to be sure that inflationary forces do not root more deeply.
The Monetary Policy Committee remains of the view that the underlying inflation pressures are of a cost push nature and that the subdued state of domestic demand and output will contribute to core inflation remaining contained, notwithstanding the continued pressures from some administered prices. However the Committee is concerned that the change in the profile of the inflation forecasts, and the extended breach of the upper end of the inflation target range, may impact adversely on inflation expectations. At this stage the breach of the upper limit is still expected to be relatively small, and inflation is expected to return to within the target range by the end of 2012.
The Committee assesses the risks to the inflation outlook to be on the upside mainly due to cost push pressures. The exchange rate is also seen to pose some upside risk to the outlook, while downside risks are seen to come from possible contagion effects from the European crisis and associated slow growth. The committee is aware of the dangers of a disorderly resolution of the crisis and the systemic implications for the global and domestic economy, and remains ready to act appropriately should the need arise.
The directional bias of interest rate policy appears to be two-sided. For now, a continuing pause seems appropriate. This was the last scheduled policy review of 2011. The next meeting will be held on January 17-19.
Copyright 2012, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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