Thursday, July 17, 2014

South Africa raises rate 25 bps but still below neutral

    South Africa's central bank raised its benchmark repurchase rate by another 25 basis points to 5.75 percent and signaled it could raise rates further by saying the rate remained slightly negative and below its longer term neutral level given the expected trajectory of inflation.
    "The monetary policy stance remains supportive of the domestic economy, and, as before, any future moves will be gradual and highly data dependent," Gill Marcus, governor of the South African Reserve Bank (SARB) said in a statement.
    Reflecting higher-than-expected inflation and lower economic growth, Marcus revised upwards the inflation forecast and reduced the growth forecast.
    South Africa's inflation rate jumped to 6.6 percent in May from 6.1 percent in April and is still expected to peak in the fourth quarter, but now at 6.6 percent compared with it previous forecast of 6.5 percent, well above the central bank's target range of 3.0 to 6.0 percent.
    For the full 2014 year, inflation is expected to average 6.3 percent, up from a previous forecast of 6.2 percent and 5.8 percent in 2013.

    For 2015 SARB also raised its inflation forecast to 5.9 percent from 5.8 percent and raised the 2016 inflation forecast to 5.6 percent from 5.5 percent, with a rate of 5.5 percent in the final quarter.
   "Inflation is still expected to return to within the target band during the second quarter of 2015, provided there are no further shocks to the system, particularly from possible higher tariff increases being granted to Eskom by Nersa from 2015," Marcus said.
    "As before, the MPC sees the risks to the headline inflation forecast to be skewed to the upside," Marcus said, warning about a possible wage-price spiral from recent wage settlements and wage demands that are in excess of inflation and productivity growth.
    The exchange rate of South Africa's rand currency also remains an upside risk to the outlook for inflation, with the rand depreciating by 2.6 percent since the previous meeting of the central bank's monetary policy committee in May as it reacted to the deterioration in economic prospects, including a contraction in the economy in the first quarter and lengthy strikes.
    The rand was trading at 10.7 to the U.S. dollar today, down 2.1 percent this year, but still up from a low of 11.3 to the dollar on Jan. 29.
     South Africa's Gross Domestic Product contracted by an annualized 0.6 percent from the previous quarter but on a year-on-year basis, GDP was up by 1.6 percent in the first quarter, down from 2.0 percent in the previous quarter 
    Marcus said economic growth in the second quarter should be positive but still subdued given the weak mining and manufacturing data.
    The bank's latest forecast, which assumes a speedy resolution of the metal workers' strike, sees growth this year of 1.7 percent, down from a previous forecast of 2.1 percent. 
    Although a strike by platinum miners has been resolved, the mining sector contracted by an annualized 24.7 percent in the first quarter of the year and production is not expected to normalize for some time.
    Growth forecasts for 2015 and 2016 have been reduced to 2.9 and 3.2 percent from 3.1 and 3.4 percent, respectively, she said.


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