Domestic outlook weak as repo rate remains unchanged
President Jacob Zuma said that an announcement on a new reserve governor could be expected, as the five year tenure of present South African Reserve Bank (SARB) governor Gill Marcus comes to and end this November.
As her last task she announced a Monetary Policy Committee (MPC) decision to leave interest rates in line with recent the weak economic activity the economy. Marcus, who will have completed her five year term, announced on Thursday that she will not be serving a second term.
In explaining the MPC decision to leave rates unchanged at 5.75% Marcus said that while inflation is the primary focus of the committee, the “MPC was also mindful of the anaemic state of the domestic economy, rising unemployment and the downside risk to its growth forecast”.
Many economists believe that this MPC decision was very dependent on present economic circumstances, but that hikes are likely in the future. She pointed out that domestic expenditure had deteriorated, “particularly private sector fixed capital formation”, which when seen with “continued moderation in household consumption expenditure” pointed to a lack of demand pressures in the economy.
“The MPC is still of the view that interest rates will have to normalise over time,” she said. “However, given the slightly improved inflation outlook notwithstanding the upside risks, the stable inflation expectations and the downside risks to the weak growth outlook, the MPC has decided that the repurchase rate will remain unchanged at 5.75% per annum.” There has been a 75 basis point increase this year so far.
President Zuma thanked the outgoing governor on Thursday for “steering the bank during difficult periods of global economic and financial recession and ensuring the achievement and maintenance of stability”.
Sizwe Nxedlana, Chief Economist at FNB warns that rate hikes can be expected in the fuure. “The SARB remains in a stagflationary bind with growth in the economy weak and inflation above target,” he said.
“Whilst the SARB opted to leave rates unchanged at today’s meeting, we remain of the view that a gradual normalisation of interest rates will continue during 2015 and 2016.
“The timing of rate hikes will be dependent on domestic growth considerations and the timing of rate normalisation in the US. Clients are advised to plan for higher interest rates over the medium term and to use the current low rate environment to pay down debt.”.