Thursday, September 19, 2013

South Africa holds rate, vows to control inflation

    South Africa's central bank kept its benchmark repurchase rate steady at 5.0 percent, as expected, but warned of upside risks to inflation and said it would "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" if the outlook deteriorates significantly.
    The South African Reserve Bank (SARB), which has held rates steady since July last year, said a sustained breach of the central bank's inflation target was not forecast and given the global uncertainties and downside risks to growth, its policy rate was maintained.
    South Africa's inflation rate rose to 6.4 percent in August from 6.3 percent in July, above the bank's 3-6 percent inflation target and though SARB Governor Gill Marcus expects inflation to moderate in the fourth quarter, she admitted the trajectory was "uncomfortably close to the upper end of the target."
    The 2013 inflation forecast is unchanged at an average 5.9 percent but for 2014 the forecast has been raised to 5.8 percent from 5.5 percent and the 2015 forecast has been raised to 5.4 percent from 5.2 percent. In the third and fourth quarters of this year, inflation is expected to average 5.3 percent.
    "The current breach of the inflation target is still expected to be temporary, and the peak was possibly reached in August," Marcus said, adding that the deterioration in the forecast was mainly due to changes in assumptions related to the exchange rate and petrol prices.
    Recent wage agreements have been above the inflation rate, contributing to the upside risks, but at the same time there are no demand side pressures in the economy, consumption is subdued with consumers under pressure with persistently high debt and little new employment creation.
    The Federal Reserve's decision to delay tapering of quantitative easing has provided a temporary reprieve to the pressure on the South African rand, however, "the continued uncertainty relating to the timing of the inevitable slowdown in bond purchases and its data dependent nature, imply that emerging market currencies, including the rand, are likely to experience a protracted period of volatility," Marcus said.
   "In the short run these developments may have moderated the risk to inflation from the exchange rate, but medium to longer term risks remain, which will be assesses on an ongoing basis," she added.
    Like many other emerging market currencies, the rand weakened sharply in May but has appreciated since late August and rose in response to the Fed's surprise decision on Wednesday to delay a  reduction in asset purchases.
    But since the start of the year, the rand has still depreciated by almost 13 percent against the U.S. dollar, trading at 9.685 earlier today.
    "The risks to the inflation outlook from the exchange rate remain elevated and dependent on its future trend," Marcus said, with a sustained depreciation posing a significant risk to inflation.
    The rand is also under pressure from the current account deficit, which widened to 6.5 percent of Gross Domestic Product in the second quarter.
    The outlook for South Africa's economic growth remains unchanged since the SARB's last meeting in July with quarter-on-quarter growth in the second quarter below the bank's estimate of potential output of around 3.5 percent, resulting in a widening of the output gap.
    SARB still expects 2013 growth to average 2.0 percent, 3.3 percent in 2014 and 3.6 percent in 2015.


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