Reserve Bank leaves rates unchanged

The South African Reserve Bank has left interest rates unchanged at the end of a two-day policy meeting on Thursday amid an improved outlook for inflation and concerns about cooling consumer spending.

Reserve Bank Governor Tito Mboweni announced the decision shortly after 3pm, saying the repo rate will remain at 12%.

The prime overdraft rate thereby remains at 15,5%.

“Notwithstanding certain risks to inflation outcomes, we feel the current stance is appropriate for now,” said Mboweni.

He indicated, though, that this decision did not mean that the tightening cycle could be seen as over.

Mboweni said CPIX inflation is expect to peak at 13% in the third quarter of this year, whereafter it should decline, eventually reaching the upper limit of the 3% to 6% target range by mid-2010.

He also pointed to the lower oil price as a factor that was considered by the bank’s monetary policy committee (MPC), but warned this may be a temporary reprieve.

The decision had been expected by 19 of 26 economists polled by Reuters last week, all of whom saw the MPC leaving the key repo rate steady at 12%. Only seven expected another 50 basis-point increase.

Colen Garrow, economist at Brait, commented on Thursday: “The outlook for inflation is better and for that reason the governor has decided to put things on hold. It’s a good decision for now.”

Said Elize Kruger, economist at Kagiso Securities: “The decision to leave rates unchanged is in line with expectations. It was the correct decision given the information at hand.

“It is good news and indicates that they are forward-looking. It shows that there is scope for a significant reduction in interest rates going forward, although this is only likely to happen around April next year. In the meantime, this economy remains under pressure.”

The central bank has lifted the rate 10 times since June 2006—raising it by 50 basis points each time—to try to bring inflation down. But inflation keeps accelerating, driven largely by food and energy costs, in contrast to consumer spending, which is under severe strain.

The targeted CPIX (consumer inflation less mortgage costs) consumer price gauge hit a record 11,6% year-on-year in June and economists expect it to peak over the next few months after a sharp jump in electricity costs filters through.

The outlook, however, is brighter, with fuel costs likely to fall for the second month in a row in September and a reweighting of the price basket in 2009 expected to bring inflation down.

Retail sales, released on Wednesday, clearly showed the pressure the past rates hikes are having on households.

“Retail sales fell in May, they fell in June, and the outlook for the second half is very weak,” Jeff Gable, head of research at Absa Capital, said. “For a reserve bank that is probably disinclined to raise interest rates, this gives them more fodder to keep rates on hold.”

Statistics South Africa said retail sales contracted by 2,6% year-on-year at constant prices in June from a 3,4% fall the previous month. New vehicle sales and housing prices are also falling as households nurse dwindling budgets.

There was also political pressure on the MPC not to raise rates again.

The Congress of South African Trade Unions has demanded looser monetary policy, threatening strikes should the Reserve Bank’s actions heap more pressure on the debt-laden poor.

However, a weaker rand—the currency has lost about 10% of its value over the past week, largely due to a dollar rally—could still worsen the outlook for inflation.

Some analysts had warned that not raising rates while inflation is so far outside the 3% to 6% target range may damage the bank’s credibility for trying to curb inflation.