Reserve Bank holds interest rates, despite oil price crash

The oil price has crashed, and while headline inflation may be under control, the Reserve Bank has decided to keep interest rates on hold in the face of a deteriorating global growth outlook and load-shedding.

Reserve Bank governor Lesetja Kganyago on Thursday stuck to his commitment to normalise interest rates, announcing that the repo rate – the rate at which banks borrow from the Reserve Bank – will stay at 5.75% for now.

This was despite some hopes that the low oil price would increase the likelihood of a rate cut, having already had an impact on inflation which slowed to 5.3% in December and is now expected to average 3.8% in 2015, compared with the previous forecast of 5.3%.

But in the announcement Kganyago warned: “Even a moderate increase in oil prices going forward will reverse the favourable inflation trajectory, and the inflation and growth benefits, while welcome, are expected to be temporary.”

Chief economist at Nedbank, Dennis Dykes, said the real change since the last Monetary Policy Committee (MPC) meeting was indeed the collapse in the oil price, which translates to a collapse in the petrol price – which is expected to come down even further in coming days. 

The Reserve Bank’s last meeting was on November 20 2014 and since then the price of Brent crude oil has dropped from around $75 a barrel to $48 a barrel currently, and translated into a saving of R2 per litre over that period. 

“At the same time, the impact of load-shedding and a deterioration of the global growth outlook are likely to offset some of the positive impacts of the lower petrol price on domestic growth,” Kganyago said.

He said the growth outlook is subdued and economic growth forecasts from the banks for 2015 and 2016 had been revised downward (from 2.5% to 2.2% in 2015 and from 2.9% to 2.4% in 2016), and  attempts to take account of electricity supply disruptions which “more than offset” the positive growth impact of lower oil prices.

The governor noted that the rand had also been affected by domestic factors, “including the disappointing domestic growth and current account deficit outcomes, as well as a resumption of load-shedding by Eskom”.

Kganyago said the global economic growth outlook remains mixed. “The US economy grew at an annualised rate of 5% in the third quarter of 2014, the fastest quarterly growth since 2003. The unemployment rate continued to decline as job creation accelerated, and lower oil prices have provided a boost to consumption expenditure,” he said. 

“Growth in the UK also remains robust, despite slower fourth quarter growth. By contrast, growth prospects in a number of other advanced economies have deteriorated, with Japan in a technical recession and the Eurozone remaining weak amid fears of deflation.”

Food prices a ‘major source of inflation pressure’
On Wednesday, the US Federal Reserve Open Market Committee released an upbeat statement which has led much of the market to stick to its expectation of a rate hike later this year. 

The US is on a divergent monetary path compared with elsewhere, where cheap money is being pumped into the global system through bond buying programmes in major economies such as the UK and Japan – and now in the European Union – with a $1.1-trillion programme announced by its central bank governor Mario Draghi a week ago. 

The low oil price – although a boon for South Africa – was enough to tip the EU into a deflationary territory on January 15 and to justify this round of quantitative easing to avoid slipping into a deflationary spiral.

With everything else going on in the world, a rate hike in the US may simply be ignored by other nations, said Dykes. He noted that the net effect of a rate hike is to strengthen the dollar. “I think the US is going to struggle to raise interest rates,” he said.  “At some point I think the Fed is going to start back-tracking. They don’t have to raise rates, if they do, it will probably be more symbolic.”

Back home Kganyago said trends in bank credit extension to the private sector continue to reflect tight conditions for households, and while wage settlements indicate a continuation of above-inflation wage and salary increases, food prices remain a major source of inflation pressure.

Kganyago indicate a rate cut is unlikely to happen soon. “For some time we have emphasised that we are in a process of interest rate normalisation. The lower inflation path gives us some room to pause in this process, particularly against the backdrop of continued weakness in the economy,” he said.  

“The MPC is aware that the moderation in inflation could raise expectations of lower interest rates. The MPC is of the view that the bar for further accommodation remains high and would require a sustained decline in the inflation rate and inflation expectations.”

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