The South African Reserve Bank’s (SARB) monetary policy committee (MPC) on Thursday decided to keep the repo rate unchanged at 8%.
The prime interest rate is therefore to remain steady at 11,5%.
This was the third consecutive MPC meeting that no change was expected after the SARB last year cut interest rates five times by 550 basis points in total. The last cut was in December 2003.
The no-change forecast was despite a steady CPIX inflation (headline inflation excluding mortgage costs) at 4,4% year-on-year (y/y) for metro and other areas in April and March from 4,8% y/y in February 2004. The CPIX has been below the mid-point of the inflation target range for six out of the past seven releases.
The SARB’s inflation target is to keep the y/y rate for CPIX within a range of 3% to 6% and most economists still expect CPIX to stay within range this year, but there is increasing uncertainty about official economic data and fuel-price policy.
The retail petrol price in South Africa has risen by 30,7% from June 2003, but the Department of Minerals and Energy capped the June increase at 30 cents a litre, instead of the free-market 38 cents a litre rise. So far the department has not informed the public what the fuel price policy is after June.
Statistics South Africa is in the process of re-benchmarking and improving its coverage of economic data.
So far it has said that using the new business frame as opposed to the old business address register has resulted in nominal manufacturing, wholesale and motor trade retail sales being underestimated by 17%, while retail trade sales were underestimated by 20%.
Economists react to MPC’s decision
John Loos, economist at Absa: “The decision was as expected but interestingly enough the South African Reserve Bank seems to see additional upside risks to inflation. The fact that the SARB says CPIX can breach the upper target later in the year is in line with our view and makes us stick to our position that there will be a 100 basis point hike in October.”
Michael Keenan, market analyst at Econometrix Treasury Management: “The MPC decision to keep the repo rate unchanged was no surprise. [SARB Governor Tito] Mboweni listed a number of inflation threats that are of concern to the bank. The bank’s bugbear remains unit labour costs.
“These comments come at a time when wage negotiations are set to begin with the auto-sector workers on the brink of a strike. The bank is really appealing to business and unions to play ball and bear the inflation target in mind. We see the repo rate remaining unchanged until first quarter 2005.”
Colen Garrow, economist at Brait: “There were no surprises in the announcement at all. This was very much in line with market expectations. Market attention will now shift to the United States Federal Reserve and see what they intend doing on the interest rate front.”
Mike Schussler, economist at T-Sec: “Very much as expected and we expect rates to remain at these levels for a couple of months. I don’t see the announcement having any impact on the rand or the bond market.”
Magan Mistry, economist at Nedcor: “Basically, the decision to maintain the repo rate was per market expectations. The major risk remains the high oil price. We think that the MPC is likely to become increasingly concerned about the oil price in the second half of the year. Therefore, we see a 50 basis point hike in the repo rate in October 2004.” — I-Net Bridge