South Africa’s c-bank leaves key rate on hold at 5.5%, cuts 2014 GDP forecast to 2.1%

By bne IntelliNews May 22, 2014

The South African Reserve Bank (SARB) decided on Thursday (May 22) to keep its key repo rate unchanged at 5.5%, in line with market expectations, saying it continues to face “the difficult dilemma” of dealing with rising inflation and a deteriorating domestic economic growth outlook. But while it saw moderating risks to inflation and revised down its 2014 inflation forecast, the central bank lowered its 2014 GDP growth forecast from 2.6% to 2.1%, saying economic growth outlook has “deteriorated markedly”. It pointed to the ongoing prolonged wage strike in the platinum sector, saying that the economic and social costs are "escalating and are potentially devastating”. The bank believes that both the mining and manufacturing sectors have contracted in the first quarter, with electricity supply constraints adding to the weak outlook.

SARB maintained its growth forecast at 3.1% for 2015 and 3.4% for 2016, but noted that the risks are increasingly to the downside against the renewed possibility of electricity load-shedding and weak business confidence.

At its previous meeting, held in March, SARB kept the repo rate unchanged following a 50bps hike in January in response to a significant rand depreciation. The bank noted that the rand has firmed somewhat since then thanks to a more benign global monetary policy environment, moderating some of the near-term upside risks to inflation, but warned that nevertheless, risks to the inflation outlook remain skewed to the upside.

South Africa’s annual headline inflation accelerated to an eight-month high of 6.1% in April from 6.0% the month before, exceeding the central bank’s 3%-6% target range, in line with its expectations. The bank’s revised slightly down its headline inflation forecast for 2014 – it is now expected to average 6.2% in 2014, compared with 6.3% previously, with a peak of 6.5% (previously 6.6%) anticipated in Q4. It maintained its forecast for average inflation for 2015 at 5.8% and projected a 5.5% average inflation for 2016. Inflation is still expected to remain outside the target band until Q2 2015.

The central bank continues to hold the view that the economy is in a rising interest rate cycle, and interest rates will have to be normalised in due course, although this does not mean that rates will be raised at each meeting, or by the same amount each time. It noted that its future decisions will be data-dependent and determined by developments in the inflation outlook and inflation expectations.

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