Nedbank says that while the short-term inflation outlook remains encouraging, the strong growth in credit poses dangers to longer-term price stability and it therefore feels that interest rates will be left unchanged in 2005.
It says that as imports are rising rapidly, reserves in relation to import cover have remained static for several months, despite a strong build-up in dollar reserves.
“This implies that more and more reserves are needed just to keep the ratio from falling. Reserves need to be at least double their current level to give any comfort from a liquidity point of view,” the bank’s economic division says.
It adds that reserves accumulation is unlikely to influence the monetary policy stance.
“Instead the bank [the South African Reserve Bank] is likely to remain focused on the inflation outlook. While the short-term inflation outlook remains encouraging, the strong growth in credit poses dangers to longer-term price stability and therefore we feel that interest rates will be left
unchanged in 2005,” it says.
Although South Africa’s yields remain attractive for now, it adds, rising United States interest rates are likely to narrow the gap and reduce the attractiveness of South African fixed-income securities to non-resident investors. This could lead to slower capital inflows in the short-term.
“However, expected sovereign ratings upgrades and the more encouraging longer-term economic outlook should continue to provide support for capital inflows.”
Figures released on Friday morning by the South African Reserve Bank show that the central bank continued to accumulate reserves at a moderate pace during December, when trading activity was lower due to the holiday season.
There was strong foreign interest in South African equities, pushing the international liquidity position (net reserves) to a new high of $11,4-billion.
Gross reserves rose to nearly $15-billion, which is equivalent to about three-and-a-half months of import cover. Gold reserves declined during the month due to the lower gold price while gold holdings were slightly up.
The rand value of the reserves also rose but at a slower pace, due to the appreciation of the rand, which gained 2,8% against the dollar during December. – I-Net Bridge