Johannesburg - The SA Reserve Bank's concern about growth and consumer growth in
particular shows that interest rate hikes are just not possible,
South Africa's Reserve Bank left the repo rate unchanged at 5.0% on Wednesday as expected, citing several risks to inflation and growth.
The Sarb says the inflation outlook had deteriorated, although risks to domestic economic growth were on the downside.
All 21 economists polled by Reuters last week saw the rate holding steady, with a majority seeing rates unchanged for the rest of the year.
"We had expected a neutral-hawkish stance, and that is what we got, especially as it was said the moderate pace of recovery should continue," said emerging market analyst Anisha Arora from 4cast Limited.
Arora said it is still a difficult balancing act for the Monetary Policy Committee (MPC), but their mandate is to maintain price stability.
She said the significant number of upside inflation risks leaves almost no room for policy manoeuvre.
ETM market analyst Chris Becker said the higher price inflation forecasts has been expected. However, to keep interest rates flat, he added "we also anticipated they are going to talk down the duration and the extent of the inflation up cycle because growth is slowing at this stage".
"So we think we're in a stagflationary environment and the SARB has to balance both of these counter trends off against one another."
He said that the CPI could accelerate rapidly and breach the SARB forecast of 6.3% and could reach levels of 7% by early next year.
Should this happen, then interest rates would have to go up, or at least the market will be pricing it in towards the middle of next year.
"If the rand also goes much higher than where it is, it also starts to bring rate hikes back into the picture," Becker said.
Stanlibs chief economist Kevin Lings said "It's the right decision, obviously the inflation risks have increased.
"It's fairly clear that inflation will breach the upper end of the targeted range for some period this year," said Lings.
Elna Moolman from Renaissance Capital said it is very clear the Reserve Bank is concerned about growth prospects.
"It labels it as being still fragile and specifically talks about the possibility that consumer growth will continue to moderate. In that scenario, interest rate hikes are just not possible."
Citadel economist Salomi Odendaal echoed Moolman about Sarbs concern for the economy's growth. He said that economic activity is still fairly weak and therefore don't expect the rate to change in the foreseeable future.
Adenaan Hardien from Cadiz Asset Management said that he expected the MPC statement to be more hawkish.
"Certainly, we think that the upside risks to inflation are quite serious. In this respect, the rand, wages and food prices are bugbears to watch."
Hardien said that there is little prospect for further rate cuts. but predicted a rise in the next decision. "Our view remains that the next move in rates will be up, but we maintain that a hike will be delayed until the end of 2014 at the earliest."
The rand was bid at R9.2754 to the US dollar after touching a worst level of R9.3146 from R9.2711 at Tuesday’s close and R9.1640 at Monday’s
The yield on the 2026 bond edged down half a basis point to 7.475% while that for the 2015 bond rose one basis point to 5.485%.
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