South Africa holds rate at 5¾% as oil prices improve inflation outlook

By Toni Weeks

San Luis Obispo, Calif., Nov. 20 – South African Reserve Bank’s Monetary Policy Committee said it decided to keep the repurchase rate unchanged at 5¾% at its meeting on Thursday. The bank last increased the rate by 50 basis points on Jan. 30, 2014.

Since the previous meeting of the committee, the sharp decline in international oil prices has contributed to a more benign global inflation environment, which may provide a boost to consumption expenditure, the bank said. Lower oil prices have also had a favorable impact on domestic headline inflation, with the medium-term forecast improving relative to the previous forecast. Underlying inflation pressures persist, however, as reflected in core inflation.

The bank noted that the consumer price index for all urban areas was 5.9% in both September and October and 6.4% in August. Downward pressure on inflation in October came from continued moderation in food and petrol prices. Core inflation, which excludes food, petrol and electricity, dropped to 5.6% in September after measuring 5.8% in August but measured 5.7% in October.

The United States and the United Kingdom remain the main drivers of global growth, although more broadly, it may get a push from lower oil and food prices, which should also benefit consumers.

The outlook for emerging markets is mixed, with emerging Asian economies expected to benefit most from the U.S. recovery, the bank suggested. This is expected to offset in part the negative impact of the slowdown in China, where growth is expected to be lower than in the past few years.

The domestic growth outlook remains subdued. Although it is expected to improve in the third quarter, that measurement is compared to the low level following prolonged strikes in the mining and manufacturing sectors.

According to the committee, the exchange rate of the rand has been relatively volatile since the last meeting in response to external and domestic factors, including the changing expectations of the timing of the first U.S. interest rate increase as well as the downgrade of South Africa’s credit rating by Moody’s Investor Service. Since that meeting, the rand has depreciated marginally against the dollar but has appreciated by 2.1% and 3.5% against the euro and pound sterling, respectively.

The bank said that interest rates “will have to normalize over time” but that it decided to hold the rate steady given the lower trajectory of headline inflation and the continued weak state of the economy. The committee added that the timing of future rate increases will be dependent on factors such as the evolution of inflation expectations, the rate of normalization of monetary policy in the U.S. and the state of the domestic economy.

© 2015 Prospect News.
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