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Kganyago’s rate resolve seen unmoved by slowdown

May 27 2015 10:09
Rene Vollgraaff and Xola Potelwa

Johannesburg - Weak economic growth in South Africa and the highest unemployment rate in 12 years may not be enough to dent Reserve Bank governor Lesetja Kganyago’s resolve to tackle accelerating inflation.

A government report on Tuesday showed economic growth slowed to 1.3% in the three months to March, less than the median estimate of 1.5% of 19 economists surveyed by Bloomberg.

READ: SA GDP increase slows to 1.3%

Forward-rate agreements starting in six months, used to speculate on borrowing costs, show investors expect 63 basis points of interest rate increases this year, 23 basis points more than at the start of May.

Power shortages are hampering a recovery from the slowest growth since a 2009 recession, and the weak economy is exacerbating unemployment, which jumped to 26% in the first quarter, the highest among 65 countries tracked by Bloomberg.

READ: Annual SA employment increases by 1.8%

Low growth cannot be solved by monetary policy alone, Kganyago said last week, warning interest rates cannot stay unchanged indefinitely with inflation seen climbing through the top of the central bank’s 3% to 6% target. The electricity crisis is also adding to prices as Eskom seeks higher tariffs to help it keep plants running.

“It matters that GDP is weak, but it matters more that inflation is stable,” Gina Schoeman, an economist at Citigroup Inc. in Johannesburg, said by phone on Tuesday. “Is today’s number to the downside enough to make the Reserve Bank less hawkish? I don’t believe so.”

Power cuts

Manufacturing and agriculture dragged down growth in the first three months of the year as the power cuts and low rainfall curbed production. The Reserve Bank this month cut its forecast for 2015 economic expansion to 2.1% from 2.2%.

“The problem is that the GDP is weak for factors which the Reserve Bank would have absolutely no control over, or no way of influencing via interest rates,” Adenaan Hardien, chief economist at Cadiz Asset Management, said by phone from Cape Town.

“Unfortunately, much as the figures are weak, we certainly don’t think that it would stand in the way of the Reserve Bank resuming rate hikes from the third quarter of this year.”

READ: 'High likelihood' of rate hikes

While the central bank has kept its benchmark repurchase rate unchanged at 5.75% since July to support the economy, rising gasoline, electricity and food costs are putting pressure on prices. An application by Eskom to raise power prices by as much as 25% could add 0.5 percentage points to inflation over the next year, according to Kganyago.

Weak rand

Inflation jumped to 4.5% in April and the Reserve Bank forecasts it will peak at 6.8% in the first quarter of next year, also spurred by a weak rand that is boosting import costs and rising food prices. The five-year breakeven rate, which measures expectations for consumer price growth, climbed 19 basis points since the start of May to 6.51%.

The rand fell 1.2% to R12.0828 per dollar by 18h00 in Johannesburg on Tuesday, taking the decline this year to 4.2%, and 14% over the past 12 months. Yields on government rand bonds due December 2026 rose six basis points to 8.17% on Tuesday, the highest level since October.

“I don’t think today’s data makes them less hawkish than they probably would have been,” Miyelani Maluleke, an economist at Barclays' Johannesburg-based investment banking unit, said by phone. “What they will remain more concerned about is the inflation outlook.”

lesetja kganyago  |  sa economy  |  inflation


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