South African Monetary Policy Stance Left Unchanged

January 19, 2012

A statement from the South African Reserve Bank’s Monetary Policy Committee left its repurchase rate at 5.5%, as it had done at its six previous meetings.  There has not yet been any rate hike, but the last reduction was implemented 14 months ago.  That cut of 50 basis points culminated a series of nine reductions over twenty-three months and totaling 650 basis points.  The committee’s next policy meeting is scheduled for very late March.

In leaving policy unchanged, officials conceded that prospects for inflation have deteriorated but also observed a worsening growth environment and concluded that it’s a tough time to balance such conflicting pressures.  So far, they are erring on the side of supporting growth and justify that bias by the lack of significant demand pressures.

On inflation, that statement attributes an upwardly revised path to weaker rand prospects.

Inflation is now expected to remain outside the upper end of the target range for the whole of 2012, and to peak in the second quarter of 2012 at around 6,6 per cent before declining gradually and returning to within the target range in the first quarter of 2013. Inflation is expected to measure 5,5 per cent in the final quarter of 2013. The Bank’s forecast of core inflation, which excludes food, petrol and electricity, shows a moderately rising trend, with the peak of around 5,5 per cent expected in the first two quarters of 2013. The main factor contributing to the upward revision of the forecast is the changed assumption relating to the exchange rate of the rand, which was partly offset by the downward adjustment to the global growth assumption.

At the same time,

The MPC is also cognizant of the slowing domestic economy and feels that given the lack of demand pressures, monetary tightening at this stage would not be appropriate.

There continue, nonetheless, to be some misgivings about this logic and a readiness to tighten if needed in the future.

The nominal policy rate is at a long term low and the real policy rate is slightly negative, indicating a monetary policy stance that is accommodative and supportive of the real economy…. the Committee will continue to monitor domestic and global economic and financial developments and the risks to the outlook, and remains ready to act appropriately to ensure the attainment of the inflation target over the medium term while being supportive of the domestic economy.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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