No surprise in rates decision

Jan 24 2013 17:54
Johannesburg - South Africa's Reserve Bank (Sarb) left its benchmark interest rate unchanged at 5.0% on Thursday, citing concerns about rising food prices and a depreciating rand exchange rate in a period of slowing growth.

All 23 economists polled by Reuters last week forecast the Reserve Bank's monetary policy committee would leave rates unchanged at 40-year lows, with 10 economists expecting the next move to be a 50 basis point hike in 2014.

Renaissance Capital economist, Elna Moolman, expressed concern over the structural constraints to growth in the local economy, "in other words, very high cost ratios and general uncompetitiveness".

She didn't foresee any further rate cuts in this cycle - at least through 2013 and also the bulk of 2014, she said.

Dennis Dykes, chief economist at Nedbank, said the Reserve Bank's decision to keep rates on hold at 5% was no surprise. "It looks like we'll probably hold steady for sometime."

"Obviously, the world is changing a bit at the moment but it doesn't look like they are going to move any time soon on the basis of today. They will probably hold steady until the situation gets a little bit more clearer later in the year."

Johan Rossouw, economist at Vunani securities said the decision is fair and was expected. "Even though the economy could do with some added stimulus, there are risks given the current levels of the rand."

Head of Research Africa, Standard Chartered, Razia Khan said Sarb sounded more hawkish than previously by clearly stating the upside risks to inflation.

She said one of the big points of interest were the comments on the exchange rate. "While the Reserve Bank was careful to repeat that 'it is a concern' mention was also made of the benefits of a weaker currency - potential narrowing in the current account gap as well as improved competitiveness."

"Our read on this remains much the same - the Reserve Bank is unlikely to react to any temporary breach of the inflation target, especially one driven primarily by supply-side factors.

"But there is little doubt, with the emphasis on the wage-price spiral and the rand, that inflation risks are now thought of differently," said Khan.

She said a gradual depreciation that poses little inflationary threat may not be unwelcome adding that "adjustments in the exchange rate are very rarely gradual".

Nomura emerging market economist, Peter Attard Montalto Sarb's announcement was more positive on global growth risks but more bearish on domestic growth while being more concerned by inflation.

"The growth/inflation conundrum continues but with the rand doing this and the increased risks highlighted of wage pass through (something that got mentioned a lot) it seems they will now keep rates on hold for the next year and a half without a marked additional growth shock alongside the presence of no signs of a wage-price spiral," Montalto said.

4Cast emerging analyst Anisha Arora said that the Reserve Bank's emphasis on watching the developments on the wage settlements further suggests rates will remain on hold for an extended period.

The rand weakened to R9.0855/$ after the decision and was at R9.0685 at 16:05 from R9.0355 just before Governor Gill Marcus made her announcement.

Earlier on Thursday the rand fell to its lowest in nearly four years against the dollar as investors concerned about the political risk from labour unrest and violent protests opted for other emerging market assets.

The rand briefly touched R9.0860, its weakest level since April 2009 before coming back to R9.0377 in ealry morning trade. The currency close at R9.06 on Wednesday.

The yield on the 14-year benchmark bond rose to 7.375% from 7.30% beforehand.

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sarb  |  repo rate



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