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Lesetja Kganyago, governor of the South African Reserve Bank (SARB) and chairman of the monetary policy committee (MPC), walks the tightrope as the MPC sets out to find the balance between lowering inflation and fostering economic growth through its interest rate decision on Thursday.
With the growth rate of SA’s economy below the growth rate of the population for the last two years, and likely to remain the same until at least the end of this year, many question whether the MPC should continue its interest rate hike cycle or whether looser monetary policy stimulus is necessary to stimulate growth.
The unfortunate circumstance is that a decrease in the interest rate would add wind to the inflation rate, which has been burning steadily above the 3%-6% target range. Inflation slowed to 6.3% year-on-year in February, down from 6.6% in January, Statistics South Africa said.
Although expectations are that the repo rate will be kept at 7%, many hope for a decrease as inflationary pressures have cooled. The recent rains that ended the drought in many parts of the country have lowered the pressure on food prices, while the stronger rand has helped our importers. The current account deficit declined to 1.7% of GDP in the last quarter of 2016, the lowest level since the first quarter of 2011, Reuters reported.
Another factor reducing inflationary pressure is the oil price, which saw a steep drop recently.
Since the US Federal Reserve’s recent interest rate hike in March, the rand has been one of the best-performing emerging-market currencies against the dollar.
In a recent interview, Kganyago explained that the MPC has very little power over the strength of the rand and that supply and demand forces in the global economy dominate its value. He went on to say that although the rand has strengthened significantly since its lows in January last year, it came off of a very low base, partly as political uncertainty weighed on the currency.
Because of the open and liquid nature of the South African market, as well as its small size, volatility is something we have all had to get used to.
Other important economic announcements due this week:
Monday
- Germany: Ifo Business Climate
Tuesday
- US: CB Consumer Confidence
Wednesday
- US: Crude Oil Inventories
Thursday
- SA: Private Sector Credit, M3 Money Supply and Producer Price Index (PPI)
- Great Britain: Gfk Consumer Confidence
- Euro Area: Business Confidence
- Germany: Inflation Rate
- US: GDP Final and Unemployment Claims
Friday
- SA: ABSA Manufacturing Purchasing Managers’ Index (PMI) and Balance of Trade
- China: NBS Manufacturing PMI
- Germany: Unemployment Rate
- Great Britain: Current Account
Giacomo Bonavera is head of foreign exchange trading at Capilis Asset Managers. Click here to visit the firm’s website.
