The repo rate — which is the rate at which the South African Reserve Bank (SARB) lends money to commercial banks — will stay stable “for some time to come”, SARB Governor Gill Marcus said on Thursday.
She was addressing a conference hosted by the Bureau for Economic Research in Sandton, Johannesburg.
“Of course, this depends on no major developments taking place,” Marcus said.
There had been rumours that as a result of poor retail sales data for February, another cut was just around the corner.
“I must warn against jumping to conclusions on one month’s data,” Marcus said.
She said it was important to look at the reasons for the latest repo rate reduction, which had taken place in March.
“Our statement emphasised that despite clear signs that the economy had emerged from the recession, the pace of recovery was still below potential.
“We saw the improvement in consumption expenditure in particular as being tenuous.”
Marcus said it did not follow that one bad retail sales number automatically led to a need for further easing.
“The latest data were a confirmation of the fragile nature of consumption expenditure growth, rather than necessarily being a downside surprise requiring further stimulus.”
She was sure that the general view of the SARB’s monetary policy committee, which had prevailed in March, would therefore be unchanged in the light of recent data.
“That is the relatively low growth in consumption expenditure, together with other factors, provided a window of opportunity to reduce rates without jeopardising the inflation target.”
Marcus said there was little doubt that the rand exchange rate was one of the most volatile currencies, and was also currently assessed to be overvalued by many market participants and analysts.
“However, estimates of the degree of overvaluation differ markedly.”
Vexing
Marcus said more vexing was the question as to what could be done about the rand.
“Direct intervention is constrained by the costs of sterilisation; the jury is still out as to whether taxation of inflows, such as applied by Brazil, are effective; and while economic theory tells us that a narrowing of interest differentials should lead to a decline in inflows, this is not always the case, particularly if lower interest rates encourage growth-sensitive flows.”
Marcus said the SARB had continued to buy foreign exchange as part of its strategy to increase the level of foreign-exchange reserves.
“Despite significant foreign-currency purchases at times, the rand has remained at elevated levels on a trade-weighted basis, but the cost of sterilisation has been significant, given the wide interest-rate differential.”
She said one of the consequences of the SARB’s interventions, and building up the gross foreign-exchange reserves of the country to $42-billion, was that the SARB would report an after-tax loss of about R1-billion for the financial year 2009/10.
“While it may appear that in the past months there has been minimal reserve accumulation, our overall reserves are reported in dollars, and the recent weakening of the euro and sterling have resulted in significant valuation changes which have, at times, dwarfed the net accumulation.”
She emphasised that the SARB had continued to build reserves as and when this had been appropriate.
While the recent reduction of interest rates had been seen by some as an attempt to weaken the rand, this was not a factor in the SARB’s decision.
“Past experience has shown that the response of the rand to lowering or raising interest rates is unpredictable, and it has previously responded by both appreciating and depreciating for varying periods of time.”
However, Marcus said the recent rand strength had resulted in an improved inflation outlook, which in turn had given room for a further rate reduction in March.
“While we do not target the exchange rate, we would want to see the rand at a stable and competitive level,’ she added. — Sapa