Wednesday, March 20, 2013

South Africa holds rate, Cyprus may undermine growth

    South Africa's central bank held its benchmark repurchase rate steady at 5.0 percent, saying its policy  stance is "appropriately accommodative" given the economy's negative output gap and events in Cyprus that could further undermine growth prospects. This is balanced against inflationary risks.
    The South African Reserve Bank (SARB), which has been in an monetary easing cycle since December 2008, said the global economy was still characterised by a multi-speed recovery, with recent events in Cyprus increasing risk and uncertainty in Europe with "the potential to reignite the banking and sovereign debt crises and undermine growth prospects further."
    In addition, the global outlook is clouded by fiscal gridlock in the United States, the bank said.
    South Africa's growth prospects are subdued despite a better-than-expected fourth quarter GDP with the bank raising its 2013 forecast to 2.7 percent, from a previous forecast of 2.6 percent, but cutting its 2014 forecast to 3.7 percent from 3.8 percent.
    South Africa's Gross Domestic Product bounced back to a 2.1 percent growth in the fourth quarter from the third for annual growth of 2.5 percent, up from 2.3 percent in the third quarter.
     For the full 2012 year, South Africa's growth eased to 2.5 percent, despite a 9.3 percent contraction in the mining sector, from 3.5 percent in 2011.

     The SARB, which cut rates by 50 basis points in 2012, estimates the economy's potential output growth at 3.5 percent and the important mining sector bounced back with annual growth of 7.3 percent in January.
    "Nevertheless the (mining) sector is expected to remain under pressure given the unsettled labour relations environment," the SARB said, adding that the unresolved labour disputes pose a significant risk to the exchange rate and economic growth.
    However, a lower rand exchange rate provides an opportunity for the country's manufacturing sector to become more globally competitive but to sustain this will require improved productivity and containment of wages and other cost, which underlines the need to control inflation, the bank said.
    South Africa's consumer price inflation rate for all urban areas rose to 5.9 percent in February from 5.4 percent in January, mainly due to higher medical insurance costs, hitting core inflation which rose markedly to 5.3 percent from 4.7 percent.
    Incorporating the new CPI weights, a rebasing and lower electricity prices, the SARB forecasts inflation to average 5.9 percent in 2013 and 5.3 percent in 2014 compared with previous forecasts of 5.8 and 5.2 percent.
    In the third quarter of this year, inflation is expected to temporarily breach the bank's upper target range, with prices averaging 6.3 percent and then easing to 5.2 percent in the final quarter.
    "This deteriorating is largely due to the depreciation of the rand and higher petrol prices, which more than offset the impact of the lower electricity price increases and lower starting point," the bank said.
    In 2012 inflation averaged 5.6 percent, in the upper end of the central bank's 3-6 percent target.
    "The MPC continues to assess the balance of risks to the inflation outlook to be on the upside, mainly due to the exchange rate and wage pressures," the SARB said, adding underlying inflation appears to be relatively contained and there is lower risk from food price inflation.
    The government's projected deficit for the past fiscal year of 5.7 percent of GDP is wider than initially budgeted due to lower revenue from weaker growth and for the 2013/14 fiscal year it is budgeted at 5.1 percent, declining to 3.6 percent by 2015/16.
    Earlier this month the Organisation for Economic Co-operation and Development (OECD) recommended that SARB cut interest rates despite rising inflation to support the economy while taking steps to prevent the rand from becoming overvalued.


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