South African Monetary Policy Left Unchanged With Tightening Bias

May 22, 2014

The committee continues to hold the view that we are in a rising interest rate cycle, and interest rates will have to be normalized in due course. We embarked on this process with our first move in January 2014. At this stage the pace and timing of normalisation in the advanced economies appears to have been pushed out further and may be more moderate than previously believed. We are also aware that this can change very quickly. Future actions will be data dependent and determined by developments in the inflation outlook and inflation expectations. Inflation is currently at uncomfortable levels and a marked deterioration in the outlook may require action that we will not hesitate to take. The MPC reiterates that a rising interest rate cycle does not mean that rates will be raised at each meeting, or by the same amount each time.

An initial 50-basis point increase of South Africa’s repo rate on January 14th remains the only move of this cycle so far.  Monetary Policy Committee officials held their fire this month even though CPI inflation of 6.1% in April exceeded the 3-6% target corridor.  While inflation is projected to fall back to 5.8% in 2015 and 5.5% in 2016, forecast risk lies to the upside, partly because of the continuing potential vulnerability of the rand to selling pressure as the U.S. moves closer to rate normalization.  South African growth is disappointing, and central bank officials just revised such for 2014 down a half percentage point to 2.1%.  Today’s released statement observes that improving South African growth is not possible by monetary policy tools alone.

South Africa’s repo rate had been slashed five percentage points between December 2008 and August 2009.  It was cut 150 basis points further to 5.5% in the first seven months of 2010 and by a final 50 bps to 5.0% in July 2012.  There it stood until this past January’s hike of 50 basis points back to 5.5%.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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