Mixed reaction to Sarb decision

Jul 18 2013 17:42
AFP and Fin24

Pretoria -The South African Reserve Bank held interest rates unchanged on Thursday, predicting high inflation and worsening economic growth.

Governor Gill Marcus kept rates unchanged at 5% as expected, but cut 2013 growth forecasts for the second time this year, from 2.4% to 2.0%.

Marcus also pointed to economic headwinds from Europe, China and the US Federal Reserve's scaling back of monetary stimulus as curbs on growth.

"While financial markets have stabilised somewhat, the risks posed to emerging economies in general, including South Africa, by normalisation of monetary policy in the US in the future, are evident," said Marcus.

"Our concern has been that this global crisis is in its sixth year, and has mutated from one problem to another. What you're seeing is as measures are taken to address these problems, it has unintended consequences and new problems arise."

SA's economy is struggling under high inflation and slow growth, a result of mining strikes, lower demand for exports and a weakened rand.

The governor said inflation, currently at 5.9%, was likely to surpass the bank's six percent-threshold in the third quarter of this year.

The monetary planning committee "continues to face conflicting policy choices relating to rising inflation and slowing growth," Marcus said.

"Macroeconomic vulnerabilities," she added, were "increasingly evident."

She attributed the worsening inflation environment to "continued currency weakness and higher-than expected petrol price increases."

To her the outlook for the mining sector remains "bleak" and that employment growth "remains subdued."

"Of particular concern is the increase in the youth unemployment rate to 52.9% in the first quarter," said Marcus.

Peter Attard Montalto, emerging markets economist at Nomura, said the bank also took aim at SA's politicians in an effort to spur reform.

"They are making a strong political statement, saying it is not their job to be supporting the economy when it's actually structural issues and issues of policy in the government's terrain that are ultimately holding back growth."

"Basically they are paralysed at the moment and they can't change rates in either direction," he said.

Carmen Nel, economist at Rand Merchant Bank said despite the bank's tendency toward stimulating the economy, it had been given little chance but to stand pat.

"South Africans should view it as a prudent decision, it's a tricky time from a risk or sentiment perspective for bank to change policy either way."

Earlier Thursday Moody's ratings agency maintained SA's Baa1 sovereign debt rating, praising a crimp on public spending and the possibility of a negotiated end to mining sector turmoil.

With the South African economy on the rocks and reform efforts stalled, some had predicted Moody's would issue a downgrade.


The MPC’s stance appears to be a considered and moderate approach, according to Andrew Golding, CEO of the Pam Golding Property Group.

"While such decisions depend on current economic data, which is subject to influence by a variety of macroeconomic factors, including global impacts, we are of the view that interest rates will remain stable for the remainder of 2013," said Golding.
From a national property perspective, Pam Golding Properties remains optimistic as housing sales by the PGP group have  continued to increase steadily year on year with monthly sales averaging at over R1bn.
"Despite ongoing challenges for consumers in respect of rising costs of fuel, electricity, food and property rates, coupled with a stricter mortgage finance regime, we note a certain uptick in the residential property market in South Africa in general," he said.

"There is an increasing sense of ‘normality’ in the market as properties change hands on a regular basis and for the usual reasons of relocation for business or personal preference, upgrading or downscaling as individual situations change in life, first time buyers entering the market, among others."

Weak growth factor

The unchanged repo rate is not surprising with consumer price inflation still not far from the upper target limit (6%) at 5.6% in May, said John Loos, FNB's household and property sector strategist.

"Weak growth is a factor that has kept interest rates at multi-decade lows for some time now and which leads us to believe that interest rate hiking is some way off," said Loos.

"However, while seeing downside risks to economic growth, the Sarb still sees upside risks to inflation, with the threat of a wage-price spiral, as a result of high wage demands, still there, while a volatile rand has also been in play."

He believes the implications of the unchanged interest rate decision are a further slowing in real household disposable income, as the effect of prior rate cuts wears thin, a more-or-less sideways movement in the household debt-to-disposable income ratio, and no further meaningful improvement in household debt servicing (repayment) performance.

"An unchanged decision also means that the combined fiscal and monetary policy impact on household sector finances remains negative, with the effective personal tax burden relative to income rising further in 2013," he said.


Uncertainty surrounding economic outcomes is unlikely to dissipate anytime soon and the Reserve Bank will be walking on a tightrope for quite some time. Future policy decisions will, of necessity, be data dependent, according to Arthur Kamp, economist at Sanlam Investment Management.

"South Africa is a small, open economy, which implies the currency plays an important role in the inflation process. With inflation expectations at the upper end of the Reserve Bank’s inflation target range the rand is a key swing factor," he said.

"Further sharp falls in the rand could cause inflation expectations to come unhinged leading to a higher wage, higher inflation spiral."

- Fin24

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sarb  |  gill marcus  |  interest rates  |  economy



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