South African Monetary Policy on Hold

January 24, 2013

The repo rate of the South African Reserve Bank will remain at 5.0%, its multi-decade low since a 50 basis point cut last July.  The benchmark interest rate was previously reduced by 50 bps in 2008, 450 bps in 2009, and 150 bps in 2010 but not at all in 2011 and just once in 2012.  Although reiterating that the present stance is accommodative yet appropriate, the latest statement from officials reads hawkishly.  Growth risks may be skewed downward, but inflation risks are stacked to the upside and increasingly so.  CPI inflation of 5.7% in the year to December 2012 was approaching the ceiling of a 3-6% target range.  On the price front, “While the risks to the forecast emanating from food prices may have diminished somewhat, particularly over the medium term, the exchange rate and wage settlements remain the key upside risk factors….. The MPC is mindful of the danger of a possible wage-price spiral. ….The exchange rate has been impacted by the widening deficit on the current account of the balance of payments during 2012 and changing global and domestic risk perceptions, particularly relating to the adverse developments in the South African labor market, and the downgrades by the various ratings agencies. …Since the beginning of the year, the rand has depreciated by 6,1 per cent on a trade weighted basis and by about 6,6 per cent against the US dollar.”

It’s not clear how soon the next rate change might be made, but it appears now more likely that the direction will be up, not down.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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