Gill Marcus: MPC repo rate decision not unanimous

Interest rates will remain unchanged, the South African Reserve Bank announced on Thursday, citing global developments, domestic electricity supply and a strike in the platinum sector as key concerns for growth. 

The Monetary Policy Committee decided to keep the repurchase rate (the rate at which banks lend to one another) steady at 5.5% following a 50 basis points hike in January this year. This means that the prime lending rate will also stay put at 9%.

The January decision marked an upward turn in the interest rate cycle which has been experiencing only cuts since early 2009. Yet 17 out of 22 economists surveyed by Bloomberg in the run up to the announcement expected the bank would pause the rate hikes for now.

Reserve Bank governor Gill Marcus said the pace of rate tightening will depend on a number of factors including projected inflation, inflation expectations, the state of the economy and global developments.

"We wish to reiterate that even though we are in a tightening cycle, there will not necessarily be a change in the stance at every meeting, and that the increments may not always be of the same magnitude," Marcus said. 

Decisions was not unanimous?
In questions that followed the announcement, Marcus indicated that the decision was not unanimous among the members of the committee. "Four decided to hold, and three wanted to raise the rate." The disagreement was not on the economic outlook but was rather a question of timing. However, "we are indicating interest rates are likely to rise in the future", she said.

Key factors affecting the global environment include the possibility of an earlier-than-expected increase in the US interest rate in 2015, further evidence of a slowdown in China, and geopolitical tensions arising from the developments unfolding in Crimea, the committee noted in its statement.

At home "the domestic economic outlook remains subdued amid continued strikes in the platinum sector and uncertainty regarding a stable and sufficient electricity supply in the coming months", Marcus said.

Inflation has edged ever closer to the upper end of the Reserve Bank's target range (of between 3% and 6%) and measured 5.8% and 5.9% in January and February 2014 respectively. The year-on-year inflation rate as measured by the consumer price index (CPI).

As indicated at its last meeting, the committee continues to expect inflation to breach the upper end of the target range in the second quarter of 2014, and to return to within the target range in the second quarter of 2015, when it is expected to measure 5.9%.

Both bank credit extension and mortgage lending have remained weak.

Marcus noted the exchange rate of the rand has been relatively volatile since the previous meeting of the MPC, having fluctuated in a wide range between R11.39 and R10.60 against the US dollar, but she said there has been an appreciating trend over this period, in line with an improving risk sentiment towards emerging markets.

Worrisome trade deficit
Brent crude oil fluctuated between a relatively narrow range since the previous meeting but the exchange rate has been the main driver of the rand petrol price, which increased by a cumulative 75% per litre in February and March, Marcus said. But, the recent appreciation of the rand has resulted in a current over-recovery in the petrol price, and expected to offset an increased fuel levy in April.

The worrisome trade deficit narrowed from 6.4% of GDP in the third quarter of 2013, to 5.1% of GDP in the fourth quarter but is expected to widen again. "Although we expect the current account to respond to the depreciated exchange rate, this adjustment is likely to be gradual and some widening of the trade deficit is expected in the first quarter of 2014," Marcus said.

The Reserve Bank has lowered its forecast for economic growth since the last meeting of the monetary policy committee – from 2.8% to 2.6% for 2014 and from 3.3% to 3.1% in 2015. 

"The risks to this forecast are seen to be on the downside, given the protracted strike in the platinum sector and electricity supply constraints," Marcus said. She also noted the strike, which has entered its ninth week, is likely to impact adversely on mining output and exports.

"The committee is aware that too slow a pace of tightening could undermine inflation expectations and may require more aggressive tightening in the future," Marcus said.

"Consistent with our mandate, a fine balance is required to ensure that inflation is contained while minimising the cost to output."

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