Repo rate weathers stormy times, but risk lies ahead
The South African Reserve Bank has once again decided not to change the repo rate, but has warned the main risks to the outlook are electricity tariff increases, the exchange rate and wage settlements.
The repo rate, the rate at which the Reserve Bank lends money to commercial banks, is the official interest rate and will stay at 5.75%. This means the prime lending rate, the average rate of interest charged by commercial banks, will stay at 9.25%. The last increase was 25 basis points in July last year.
Headline inflation appears to be under control and was 4.5% in April, up from 4% in March.
The bank warned that the downward inflationary trend had ended with the Brent crude oil price beginning to stabilise. It has gained $10 a barrel since the last monetary policy committee meeting at the end of March, and a petrol price hike is likely in June.
The central bank now expects inflation to average 4.9% in 2015, with a first quarter low of 4.1%.
A temporary breach of the upper end of the inflation target band is still expected during the first quarter of 2016 – peaking at 6.8% and dropping to 6% by the second quarter of that year.
The Reserve Bank governor, Lesetja Kganyago, who took over the reins from Gill Marcus in November last year, said in announcing the rates decision on Thursday afternoon that electricity tariff increases had not been factored into the decision and posed a significant risk.
Electricity shortages are expected to affect growth and the bank’s forecast has been revised downwards as a result. Gross domestic product growth is now expected to average 2.1% in 2015 and 2.2% in 2016.
“This forecast makes an assumption regarding the persistence of electricity shortages, which are expected to be relieved somewhat only in 2017,” Kganyago said.
“The rand remains vulnerable to global market reaction to United States policy normalisation, particularly in the context of South Africa’s twin deficits. Any significant weakening of the exchange rate in reaction to US monetary policy tightening could cause inflation to diverge even further from target, and set in motion an exchange rate/inflation spiral.”
He said, since the last committee meeting, in line with dollar weakening, the rand had depreciated by 0.6% against the euro and by 4% against the pound. He also expressed concern about the possibility of a wage price spiral should settlements well in excess of inflation become an economy-wide norm.
In a note before the announcement, analysts at Nomura said the committee’s views on the US Federal Reserve would be important. Indeed, in the rates announcement, Kganyago said global financial markets remain focused on the timing of US monetary policy tightening.
“Low inflation and the weaker first quarter growth outcome have pushed out expectations regarding the starting date, but financial markets generally expect the first move to be during 2015, most likely in September, followed by a gradual data dependent tightening cycle,” he said.