Reserve Bank has difficult balancing act ahead

The South African Reserve Bank is under pressure to balance the potential of a full-blown financial crisis in Europe with weak growth domestically, an economist said on Thursday.

The SARB needed “to be trigger-ready in light of global risks and the potential for an implosion in Europe”, said Razia Khan, regional head of research Africa, for Standard Chartered Bank.

On the other hand, it was faced with a “domestic outlook of continued weak growth [albeit with some recovery in evidence] and inflation that looks set to breach the target before the end of the year”.

Khan was responding to the SARB monetary policy committee’s (MPC) earlier decision to leave the repo rate unchanged at 5.5%.

“The SARB left interest rates unchanged in line with our expectation, although we concede given global risks, that it was always going to be a tough call,” she said.

“In the end, a deterioration in the SARB’s inflation forecasts, suggesting a breach of the target for a sustained period of time, seems to have carried the day.”

The MPC now expected its inflation target of between 3% and 6% to be breached in the final quarter of 2011.

SARB governor Gill Marcus said inflation would peak around 6.3% in the first quarter of 2012, before declining gradually to within the target range in the final quarter of 2012. It would reach a level of 5.2% in the final quarter of 2013.

Coming together
Khan said it appeared South Africa’s domestic recovery was “gradually coming together”.

“Of course, there are significant risks to this, and nowhere—least of all South Africa with its dependence on Europe as a buyer of its manufactured exports—is going to be immune to a more severe Euro area downturn,” she said.

Trade union Uasa said keeping the repo rate unchanged was the right decision.

“The economy is still sluggish and workers are struggling to keep up with high fuel and electricity prices,” spokesperson Jacques Hugo said in a statement.

BDO Wealth Advisers director Allan Heynen said a rate cut would have been good for those in debt, but not for those living off investments.

“A cut would have brought welcome relief to over-indebted consumers, but it would also have put further pressure on pensioners who are already struggling with interest rates at multi-decade lows,” he said in a statement.

“They have experienced a collapse in income whilst having to accommodate ever-increasing living costs.”—Sapa