No surprises from reserve bank as rate remains static
It said that the inflation outlook had deteriorated, but also forecast moderate growth. The bank's forecast did not come as a surprise to the majority of economists, who believed it was unlikely to change the interest rate given present economic conditions.
Reserve Bank governor Gill Marcus said that factors leading to the MPC's decision included the continued depreciation of the rand, the high fuel prices, the global economic slowdown and ongoing labour unrest at mines, which continued to discourage investors. These factors had to be weighed against positive developments such as the food price inflation rate, which went from 7.5% last year to 6.4% in January and 6.3% in February, and export opportunities arising from a weaker rand.
A four-year low
The currency hit a four-year low against the dollar in the past two weeks, reaching R9.29 and trading at R9.23 shortly before the MPC announcement on Wednesday. It traded for a while at R9.21 after the announcement, before slipping to R9.28.
Marcus said she believed that the economy was still below potential and that the rand's drop below R9 was "overdone". She did, however, expect the rand to remain volatile for a few months, which means it remains a main inflation risk.
The governor said she expected inflation to average at about 5.9% this year, keeping it within the 3% to 5% target range. She said, however, that it was likely to breach 6.3% in the third quarter for one or two months before returning to below the 6% mark.
Marcus had already indicated that the reserve bank would be more tolerant of inflation at the upper end of the target range because of subdued growth and the negative output gap.
She said the bank expected a moderate recovery this year. "The forecast is for growth of 2.7% this year, marginally up from the previous forecast of 2.6% and 3.7% in 2014, compared with a previous forecast of 3.8%. The risks to these forecasts are assessed to be on the downside."
Marcus said the MPC believed that domestic growth prospects remained relatively subdued "notwithstanding a better than expected fourth quarter gross domestic product growth outcome and positive developments in the mining and manufacturing sectors in January".
Economic growth outlook
Though Marcus felt that the weaker rand created opportunities for exporters, she did qualify the statement by saying that the advantages had to be looked at against poor demand and a slow global recovery.
"The economic growth outlook is more or less unchanged from the previous meeting, and risks to the outlook remain on the downside," she said.
Marcus also issued a warning about the negative impact "excessively high wage increases" could have on the economy, indicating that it could stifle growth in employment.
"The economic growth outlook is more or less unchanged from the previous meeting of the MPC, and risks to the outlook remain on the downside. The unresolved labour disputes in the mining sector pose a significant risk to the exchange rate and to economic growth through their negative impact on export revenues, employment growth and investor perceptions of South Africa."
Absa economist Chris Gilmour said that the monetary policy committee faced a difficult challenge. He said many factors had to be taken into consideration when it came to the repo rate "being outside their [the Reserve Bank's] control … such as the slow global recovery".