South Africa holds rate at 5%, with inflation outlook on upside

By Toni Weeks

San Luis Obispo, Calif., Sept. 19 - South African Reserve Bank's Monetary Policy Committee again decided to keep the repurchase rate unchanged at 5%, according to a bank announcement.

Since the previous meeting in July, domestic inflation has breached the upper end of the target range, as forecasted. The bank said inflation is expected to moderate somewhat in the final quarter of 2013.

The outlook for domestic economic growth remains unchanged but has been overshadowed by protracted work stoppages. Where wage agreements have been reached, they have generally been above the headline inflation rate, contributing to the upside risk to the inflation outlook.

The decision by the U.S. Federal Reserve Bank to delay the tapering of quantitative easing surprised the markets, the committee said, and emerging market currencies responded strongly, with many seeing overnight currency appreciation. Although the delay has provided a temporary reprieve to the exchange rate, the continued uncertainty relating to the timetable for slowing down bond purchases is likely to cause a protracted period of volatility in emerging market currencies, including the rand.

The year-over-year CPI inflation rate increased to 6.3% in July and 6.4% in August. Core inflation, which excludes food, petrol and electricity, measured 5.1%, down from 5.2% in July. The bank's inflation forecast has deteriorated further since the previous meeting. Although it is still expected to be unchanged at 5.9% in 2013, inflation is expected to average 5.8% in 2014, up from the previous forecast of 5.5%, and 5.4% in 2015, up from the previous forecast of 5.2%. According to the notice, the deterioration in the forecast is mainly due to changes in assumptions related to the exchange rate of the rand and petrol prices.

The bank felt that global economic prospects have improved in some advanced economies, but downside risks remain. In the United States, growth appears to be gradually improving, but higher mortgage rates and fewer mortgage applications could derail improvement in the housing market, and the debt ceiling issue is expected to resurface in mid-October, possibly resulting in unplanned fiscal expenditure cuts.

The euro zone emerged from its protracted recession in the second quarter of 2013, but economic growth is expected to remain weak for some time. This tentative outlook is compounded by fragile political environments in a number of countries.

Although the breach of the upper end of the inflation target is expected to be temporary, the bank noted that the upside risks to the inflation outlook require careful monitoring.

The bank said it will not hesitate to take appropriate action in order to maintain the integrity of the inflation-targeting framework and to anchor inflation expectations at a lower level should the risks to the medium-term inflation outlook deteriorate significantly.

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