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As expected, the South African Reserve Bank left its repo rate unchanged at 5.5% on conclusion of its first policy meeting of 2012. Since the MPC’s previous meeting, the outlook for both domestic inflation and economic growth has deteriorated, posing even greater challenges to the MPC and its decision making process going forward.
Inflation is now projected to remain above the upper end of the target bracket for an even further extended period, although there appears to be no significant demand pressures in the domestic economy as of yet. Growth statistics for the fourth quarter have not yet been released but are anticipated to be slightly higher than the dismal rates recorded over the previous two quarters; however, the growth forecast for both 2012 and 2013 has still been revised downwards. The primary reason for the waning domestic outlook is the persistent crisis conditions and associated risk thereof stemming from Europe. Once again the SARB has to perform a delicate balancing act taking into consideration both its concerns over slow economic growth along with the expected increases in inflation.
The Repo rate thus remains at this 30 year low; which has been maintained to help support economic growth whilst at the same time curbing price pressures from a volatile Rand and keeping core inflation levels in check. The outlook for the Rand exchange rate remains highly dependent on global risk appetite. The Rand has continued to fluctuate wildly over the last month as the risk appetite of the developed world swings between “risk off” and “risk on” based on crisis developments.
The South African inflation Rate (CPI) came in slightly higher than expected at 6.3% in January 2012. The SARB inflation forecast has been revised upward and is expected to remain outside the upper end of the 3%-6% target bracket for the whole of 2012, hitting its peak level of 6.6% around quarter 2, before gradually descending and returning to within target range only in the first quarter of 2013. The higher inflation continues to be driven by food, fuel and administered prices.
Despite the weak economic performance displayed over the third quarter of 2011, employment growth surprised on the upside, with unemployment rates coming in at 25%, down from the 25.7% recorded the previous quarter. Growth in household consumption expenditure tends to be the main driver of economic growth in South Africa; however, this expenditure continues to be constrained by high levels of existing debt, tight lending standards and the above average increase in administered prices, all of which reduce household disposable income. Having said this, the household debt-to-disposable income ratio has also dropped from 75.8% in quarter 2, down to 75% in the third quarter. But this gradual deleveraging by households reflects the fact that disposable income is increasing at a faster rate than that of debt accumulation and this, coupled with lower interest rates, is providing some much needed debt relief.
At the latest MPC meeting Gill Marcus highlighted the fact that the committee maintains a preference for a stable interest rate environment given the conflicting pressures on monetary policy at this time. The committee promises to monitor both domestic and global economic and financial developments, along with the associated risks. Once again Marcus stated that the MPC will remain ready to act appropriately to ensure the achievement of the inflation target over the medium term, whilst still being supportive of the domestic economy.
Given the ever increasing effects of inflation, the consensus view is that the next move in interest rates is going to be upwards, in order to maintain the MPC’s sole mandate (inflation targeting). However, with extremely sluggish domestic and global growth the question is when will the central bank be able to do so without further hindering the growth outlook?
The big 4 commercial banks prediction of the first rate hike seems to be creeping further and further outwards (towards first rate hike only being in 2013). Our view remains that the SARB will remain accommodative and keep interest rates stable (mirroring their developed world counterparts – the US are expected to keep rates low through to 2014) until such time as domestic consumer demand is renewed to a level where core inflation starts overheating. As things currently stand, such a scenario seems a fair way off and as such we expect rates to remain unchanged through 2012.
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