South Africa’s c-bank hikes key rate to 5.75%, slashes 2014 GDP forecast to 1.7%, lifts inflation outlook

By bne IntelliNews July 17, 2014

The South African Reserve Bank (SARB) decided on Thursday (July 17) to lift its key repo rate by 25 basis points to 5.75%, saying it continues to face “an increasingly difficult dilemma” of dealing with rising inflation and slowing growth.

SARB’s governor Gill Marcus told a news conference that since the previous meeting of the Monetary Policy Committee (MPC) in May, the economic growth outlook has deteriorated against the backdrop of the five-month platinum strike that ended in late June and the ongoing for more than two weeks now strike in the steel and engineering sector. At the same time, inflation spiked to 6.6% in May, breaching the upper end of the central bank’s 3%-6% target range, driven primarily by the depreciation of the local rand currency and rising food prices. In addition, a possible wage-price spiral resulting from recent wage settlements and wage demands considerably in excess of inflation and productivity growth have added to the upside risk to the inflation outlook.

SARB revised slightly up its headline inflation forecast - it is now expected to average 6.3% in 2014, compared with 6.2% previously, with a peak of 6.6% (previously 6.5%) anticipated in Q4. The forecast average inflation for 2015 was raised to 5.9% from 5.8%, and the forecast for 2016 was increased to 5.6% from 5.5%. Inflation is still expected to return to within the target band in Q2 2015, provided that there are no further shocks to the system, particularly from a possible hike in electricity tariffs.

SARB noted that after the 0.6% q/q GDP contraction in Q1, growth in Q2 is expected to be positive, but subdued, particularly in the light of weak mining and manufacturing data in May. It lowered its 2014 growth projection to 1.7% from 2.1% expected in May and 2.8% at the beginning of the year, stressing that the forecast assumes a speedy resolution of the current strike, while a potential protracted work stoppage by the metal workers would have much wider ramifications because of the direct linkages to other sectors of the economy. The bank cut also its growth forecasts for 2015 and 2016 to 2.9% and 3.2% from 3.1% and 3.4%, respectively.

SARB noted also that the impact of the platinum strike on exports began to be felt in April and May, and it is estimated that during these two months the value of platinum group metals (PGM) exports was by around ZAR 20bn (USD 1.9bn) lower than in Q1. This is likely to put pressure on the current account balance in Q2, following a surprise narrowing of the deficit to 4.5% of GDP in Q1.

The MPC said it remains concerned about weak growth, widening output gap, negative employment outlook and the further upside risks to inflation. It stressed, however, that the sources of the below par growth performance are largely outside the realms of monetary policy and urged management and labour to improve their interaction and relationships and “get South Africa back to work”. Moreover, the bank saw an urgent need to implement necessary structural reforms, as envisaged in the National Development Plan, in order to achieve higher and more inclusive growth.

Regarding its future monetary policy decisions, SARB repeated that that the economy is in a rising interest rate cycle, and interest rates will continue to be normalised, as any future moves will be gradual and highly data dependent.

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