Reserve Bank Governor Tito Mboweni kept interest rates unchanged, with the repo rate at 7% and in turn a prime rate of 10,5%. And this week the JSE breached the magical level of 20 000 points, and factories showed signs of bleeding because of the strong rand.
Speaking in Pretoria on Thursday at the end of the two-day monetary policy committee meeting, Mboweni said the inflation outlook “remains promising” despite an uncertain global environment.
The Reserve Bank will take heart from the fact that last year’s oil price spikes did not have second round effects for the South African ecoÂnomy — the rise in inflation brought about by the rise in the petrol price. The inflation rate minus mortgage rates, or CPIX, rose by 3,7% in November before rising by 4% in December, the first time in months that inflation came in at above expectations.
On Wednesday, the JSE gave investors some cheer when the All Share index broke through the 20Â 000 mark for the first time. This is up from about 13Â 000 points a year ago, a year during which the bourse has risen by about 40%. Part of the lift came from suggestions that after raising rates for the 14th consecutive time, the United States was nearing the top of its rate cycle, suggesting that rates would stay flat before eventually going down, leading to an ebbing of inflows into the United States in favour of places like South Africa and a further boost for the local economy.
Also on Wednesday, the Investec Purchasing Manufacturing Index (PMI) showed that there is blood on the factory floor, largely thanks to the strong rand. The index fell to 48,1 in January from 52,5 points in December. This is the first time since the last quarter of 2003 that the index has fallen below the key technical level of 50 points, which signals a contraction in the sector. Over the past three years, the manufacturing sector has reacted to new stronger levels of the rand with cacophonous strains in the early stages, lasting about a quarter, only to recover when the factory owners make adjustments to improve efficiency. These include laying off some workers.
The latest dip in manufacturing activity is not expected to significantly hamper growth as the other drivers of growth, consumer spending and government infrastructure spending, are firmly in place, with the latter expected to gather momentum in the year ahead.
Mboweni took time to praise a number of key economic players for their role in keeping inflation in check. He noted “well anchored” inflation expectations as a cause for optimism. The Reserve Bank now expects inflation to stay within its band of 3% to 6% for the next two years, ending 2007 at 4,7%.
Mboweni highlighted administered prices and wage settlements as two areas whose restraint has aided the inflation-fighting cause. Wage settlements in 2005 rose by 6,3%, down from 6,9% the year before, a trend that Mboweni described as
“moderate and welcome”.
Razia Khan, an economist at Standard Chartered Bank, said although Thursday’s unchanged stance was expected, there is room for a cut in the months ahead. This depends on oil prices and the rand holding firm to shield the economy from imported inflation. At the last monetary policy committee meeting in December, the price of Brent crude oil was $55 a barrel, compared to this week’s $65 a barrel.
Also during that time the rand moved from R6,75 to the dollar to R5,95, before this week’s trading level of about R6,10.
Mboweni emphasised that without petrol CPIX was actually at 3%, and when announcing his stance emphasised that rates are kept steady “for now” suggesting room for a future cut.