Thursday, January 24, 2013

South Africa holds rate, inflation risks limits rate cuts

    South Africa's central bank held its benchmark repurchase rate steady at 5.0 percent and said a deteriorating outlook for inflation, due to the depreciation of the rand and wage pressures, had limited the bank's ability to ease its policy.
    The South African Reserve Bank (SARB), which cut rates by 50 basis points in 2012, said its current policy stance was "accommodative and appropriate" with the real policy rate slightly negative, notwithstanding the temporary breach of the inflation target.
    "However, further accommodation at this stage is constrained by the upside risks to the inflation outlook," the bank said in a statement, quoting its governor Gill Marcus.
    The central bank revised upwards its forecast for inflation and cut its forecast for economic growth.
    South Africa's inflation rate rose to 5.7 percent in December from 5.6 percent, continuing the uptrend in recent months due to price increases in mining and quarrying, agricultural products and manufactured food, the bank said.
    In 2012 inflation averaged 5.6 percent, in the upper end of the central banks's 3-6 percent target.

    Reflecting the worsening outlook, the central bank raised its forecast for inflation to 5.8 percent in 2013, up from a previous forecast of 5.5 percent, with prices expected to peak at 6.1 percent in the third quarter of this year and then gradually ease. For 2014 the bank expects inflation of 5.2 percent, up from a 5.0 percent forecast. The forecasts do not incorporate new CPI weights and a rebasing, which the bank expects will only have a marginal effect.
    The forecast for core inflation is more or less unchanged, the bank said, illustrating the continued absence of demand pressures. For 2013 core inflation is expected to average 4.9 percent and 4.5 percent in 2014.
    "The exchange rate has been impacted by the widening deficit on the current account of the balance of payments during 2012 and changing global and domestic risk perceptions, particularly relating to the adverse developments in the South African labour market, and the downgrades by various ratings agencies," Marcus said, adding the rand had depreciated by 6.6 percent against the U.S. dollar since the beginning of the year.
    South Africa's economy has been hit by labour disputes and the possibly closure of mines and shafts with Gross Domestic Product rising by only 1.2 percent in the third quarter from the second quarter, for annual growth rate of 2.3 percent, down from 3.1 percent in the second quarter. For the year, the bank expects growth of 2.5 percent.
    For 2013, the central bank cut its growth forecast to 2.6 percent from a previous 2.9 percent but revised upwards its 2014 forecast to 3.8 percent from 3.6 percent due to a more favourable global outlook.
    "However, the risks to these forecasts are assessed to be on the downside, given uncertainties and instability in parts of the mining and agricultural sectors in particular," Marcus said.
    The central bank is worried about the potential impact of higher wage settlements on employment and inflation.

    "The MPC is mindful of the danger of a possible wage-price spiral and further employment losses should unaffordable real wage demands be granted while economic growth remains constrained. The risk to inflation should this scenario play itself out are significant in the absence of productivity gains," Marcus said.



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