South Africa’s central bank surprised markets by keeping its repo rate unchanged at 7,5% on Thursday on concerns about stubbornly high inflation and signs an economic downturn may be nearing an end.
The decision came despite the country’s economy falling into its first recession in nearly two decades in the first quarter of this year, stung by a global slowdown, and vocal demands from trade unions for more relief to help save jobs.
The rand was a tad stronger at 3.45pm and was bid at 8,0370 to the dollar from an overnight close of 8,0595. It was bid at 11,2091 to the euro from a previous 11,2108 and at 13,1043 against sterling from 13,2069.
Central bank Governor Tito Mboweni said fuel and electricity price increases posed risks to the inflation outlook, and inflation remained sticky outside the 3% to 6% band.
”We, as a committee, are still concerned that inflation remains stubbornly high and the rate of decline is very small,” he said in a televised statement.
Government bonds extended losses after the announcement, with the yield on the 2010 bond up 27 basis points at 7,14% at 2pm GMT.
Only two of 26 economists polled by Reuters last week expected the no-change decision, with 24 predicting a 50 basis point drop.
The decision will further anger powerful trade union and communist party allies of the African National Congress, that have been demanding bigger and more rate cuts to drive the economy out of recession.
It may also end any chance of them accepting Mboweni being appointed for a third five year term when his contract ends in August.
Should President Jacob Zuma not reappoint him, the announcement may well have been his last as governor.
Mboweni defended the decision, before adding that he had failed to convince the trade unions in a recent meeting that high inflation was bad.
”High levels of inflation are no friends of the working class and the poor,” he told reporters on Thursday.
Targeted consumer inflation remained above the 3% to 6% target range at 8% in May, despite falling factory gate prices.
A 31,3% annual rise in electricity costs from July and an expected big increase in fuel costs may help to keep CPI outside the band for some time.
CPI is seen back in the band in the second quarter of next year.
Mboweni said the domestic economy continued to show signs of distress, with the latest data suggesting another contraction in the second quarter.
But, there were signs, both internationally and at home, that the downturn was nearing a turning point, although recovery was expected to be slow, he said.
Surprise decision
Mike Schussler, economist and director of Economists.co.za, said the decision had taken most people by surprise, ”including myself”.
”It is perhaps an indication that most of the rate cuts are now behind us. It shows that perhaps the MPC is having second thoughts on fighting inflation and we can only hope that there might be a further cut in the second half. It’s obviously not good for money markets, and as many economists have already suspected, we may have approached the end of our cutting cycle,” Schussler said.
Doret Els, economist at Quantum Asset Management, said it was the right decision.
”If you look at the CPI figures released on Wednesday, they show that inflation is still sticky around 8%. Also private [sector] inflation expectation still points to inflation exceeding 6% up until 2011, and that is very dangerous.”
Adenaan Hardien, economist at Cadiz Asset Management, said: ”While the MPC continues to see the domestic economy as very weak, it flagged increasing signs that things are stabilising. And while weak activity and a firmer rand remain positive for the Bank’s inflation outlook, the MPC also highlighted negative risks from cost-push pressures, particularly from electricity and other administered prices.
”The Bank now sees inflation falling back into the target by the second quarter of 2010 and remain in the target until the end of 2011.
”Today’s decision marks the end of the cutting cycle.”
Razia Khan, economist at Standard Chartered, said it was difficult to separate the political backdrop to the decision.
”Given union calls for more aggressive easing, the Reserve Bank would have been keen to assert its independence, demonstrating that price stability is their mandate.
”It is also possible to read in this an admission that with administered price increases contributing sizeably to the overall rise in CPI, the SARB alone cannot hope to control inflation fully. They can only react with the tools they have available to them. So electricity tariffs were increased. That would have to signal an end to the rate easing cycle for any inflation-targeting central bank. Point made.
”Although the decision is a negative for bonds, and a negative for equities, the ZAR should benefit from its continued yield attraction. The easing cycle will almost certainly pause — there is no meeting in July — but we would not dismiss a further cut in the repo entirely. For now, a further cut in the repo is not the central scenario, but the risk of renewed easing still lurks in the background.”
Absa said the decision was a ”disappointment”.
The decision did not help ”an already heavily-indebted household sector” struggling with debt repayments.
A lower mortgage rate would have further improved the affordability of housing over a wide front, said Luthando Vutula, managing executive of Absa Home Loans.
”A further cut in interest rates would have implied that mortgage repayments would have dropped by 26,3% since December last year when the mortgage rate was still 15,5%,” he added.
The monthly repayment on a R500 000 mortgage loan over a 20-year term would have dropped by another R169 if there had been a 50 basis interest rate cut, he said.
”This implies a cumulative monthly saving of R1 778 on a R500 000 mortgage loan since December last year.”
According to Vutula, the economy was expected to remain under ”a lot of pressure” until late this year.
This would continue to affect employment, household income and the property market.
In view of these developments, he encouraged consumers to keep expenses under control and look for affordable properties.
Marcel de Klerk, managing executive of Absa Vehicle and Asset Finance, said another 50 basis points cut would have brought further relief to customers.
”We don’t expect the vehicle market to rebound until 2010 as sales are based on customer confidence, and this is seriously lacking at the moment.
”Affordability is still an issue and the main reason customers have fallen into arrears, especially in the lower income groups,” said De Klerk.
A further reduction of 50 basis points on vehicle finance of R150 000 over a 60 month term, would have brought relief of R37 per month.
Since December 2008, the relief would have been R384 per month.
Greater activity in the property market
Andrew Golding, chief executive of the Pam Golding Property group, said interest rate reductions since December 2008 had lessened the financial burden on existing home owners.
”Where prospective home owners are able to obtain mortgages, their affordability is now significantly greater as a result of the notable drop in interest rates.
”What we are currently seeing in the marketplace is that where aspirant purchasers are able to obtain mortgage finance, there is greater activity between willing sellers and serious buyers. However the current market remains underpinned by cash buyers at virtually all levels of the marketplace. At present they form the bulk of the market and are capitalising on the good buying opportunities currently available.”
”On a positive note the market has improved when compared with the same trading period last year. And despite the tough economic situation and seasonal impact, the very top end of the market continues to surprise us with its resilience with real and relevant prices being achieved,” said Golding.
”Having said that however, and being in the midst of winter, we are heading into a time of year which is seasonally quieter season in terms of residential property sales in general. It is also true that the recovery of South Africa’s residential property market is still dependent on the banks injecting more liquidity into the market,” said Golding. – Reuters, I-Net Bridge