A two-day meeting of the South African Reserve Bank’s (SARB) monetary policy committee (MPC) ended in Pretoria on Thursday afternoon when SARB Governor Tito Mboweni announced repo rate will be kept steady at 7,5%.
Earlier reports said two-thirds of economists surveyed predicted no change in the repo rate, but a third expected a 50 basis-point cut.
The no-change forecast was despite the fact that CPIX inflation (headline inflation excluding mortgage costs) has been below the midpoint of the SARB’s inflation target range of 3% year-on-year (y/y) to 6% y/y for 11 out of the past 13 releases. The exceptions were 5% y/y in June this year and 4,8% y/y in February this year.
The economists expecting no change based their forecast on the high economic growth — the third-quarter growth rate of 5,6% quarter-on-quarter seasonally adjusted and annualised was the highest since the first quarter of 1996 — and surging M3 money supply growth, which rose by 15,72% in the year to the end of October from 14,7% in the year to the end of September.
Credit extension to the private sector grew at a rate of 10,21% y/y in October from 8,23% y/y in September.
The economists who expected a rate cut said the SARB only has an inflation target, and secondary indicators such as economic growth and money supply are only relevant if they have an impact on inflation.
They pointed to the slowdown in unit labour costs and the December drop in the retail petrol price, which indicate that inflation pressures are easing.
Economists react
South African economists on Thursday reacted to the MPC decision on interest rates.
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Magan Mistry, Nedcor economist, said: “The unchanged repo rate was broadly as expected, with the governor highlighting certain risk cases, especially credit and money supply growth.
“The MPC will remain cautious in 2005 … the first move in interest rates is likely in the first quarter of 2006, and the move could possibly be up.”
Mike Schussler, economist at T-Sec, said: “The decision was very much as expected, although some people expected an interest-rate cut. I think the decision will be good for the rand and neutral for the JSE [Securities Exchange] and bonds. We are likely to see lower inflation next year.”
Monica Ambrosi, economist at Standard Bank, commented: “We are not surprised, although there was room to cut by at least 50 basis points; nonetheless it’s not a surprise that the repo rate has been left unchanged. If inflation remains well-contained — which seems to be the case — we should see a rate cut early next year.” — I-Net Bridge