Wednesday, January 29, 2014

South Africa raises rate 50 bps, says won't hesitate to act

      South Africa's central bank raised its benchmark repurchase rate by 50 basis points to 5.50 percent, surprising economists who had expected rates to remain stable, and said further moves would depend on economic data but the bank would "not hesitate to act" to keep inflation under control.
   Despite the rate rise, Gill Marcus, governor of the South African Reserve Bank (SARB), said she  still viewed the current monetary policy stance as accommodative and the depreciation of the South African rand currency so far could improve the country's international competitiveness, provided that it is not eroded through higher wages and other costs.
    South Africa's rand has already been hard hit by the U.S. Federal Reserve's withdrawal of quantitative easing and if sustained, further depreciation "will raise significantly the risk to the inflation outlook," despite the lack of domestic demand pressures, Marcus said in a statement.
    Reflecting the impact of the depreciation of the rand on the cost of imported prices, the central bank raised its 2014 inflation forecast by 0.6 percentage points to 6.3 percent and by another 0.6 points to 6.0 percent in 2015, with inflation expected to average 5.9 percent in the final quarter of next year.
   Headline inflation is forecast to breach the central bank's upper limit in the second quarter of this year, reaching a peak of 6.6 percent in the fourth quarter before easing to 6.0 percent in the second quarter of 2015. The central bank targets inflation in a range of 3-6 percent.

    South Africa's inflation rate was only marginally higher at 5.4 percent in December compared with November's 5.3 percent - in 2013 inflation averaged 5.7 percent - but the central bank said this did not reflect the risks from the depreciating rand as food prices had contributed to the downside surprises in inflation in the past two months and is not expected to persist.
    While the pass-through of the lower exchange rate has been muted so far, Marcus said domestic petrol prices have immediately reacted with prices up by 55 cents per litre in December and January and a further rise of over 30 cents per litre can be expected in February.
    "Sustained upside pressure from petrol prices on inflation can therefore be anticipated should the rand continue to depreciate," Marcus said.
    The rand already fell 19 percent against the U.S. dollar last year as the Fed prepared to reduce its asset purchases and was hit last week by a volatility in emerging market currencies after concern over a slowdown in China, falling to 11.14 to the U.S. dollar earlier today, down almost 6 percent in 2014.
    In the last two months of 2013, net sales of South African bonds and stocks by non-residents amounted to 21.0 billion rand and 19.4 billion, reversing inflows during the earlier part of the year for net purchase of bonds and stocks in 2013 by non-residents of only 1.3 billion compared with net purchases of 85.2 billion in 2012.
    Year-to-date, net sales of equities and bonds have totaled 19.3 billion rand, Marcus said.
    Although the Fed's gradual withdrawal of extraordinary accommodative policy signals an improving U.S. economy, and the outlook for the UK economy is also improving, Marcus said this didn't mean that the global financial crises was over, merely that "we are now entering a phase of the crises that is creating new challenges for emerging market economies."
    The combination of sharply depreciating currencies, capital outflows, slowing growth, rising inflation, current account and/or fiscal deficits and deteriorating confidence is posing policy challenges and difficult trade-offs for many emerging markets, she said.
    Marcus said the central bank carefully considered its own response to these challenges, weighing significant upside risks to inflation against the weak outlook for growth, with capital outflows and the current account deficit exacerbating the difficulties.
    "Exchange rate pressures are expect to intensify as markets adjust to the new pattern of global capital flows," Marcus said, as the process of normalization of monetary policy in advanced economies spills over to South Africa.
   The outlook for South Africa's economy is subdued due to low business confidence and SARB cut its growth forecast for 2014 to 2.8 percent, from 3.0 percent, and to 3.3 percent for 2015 from a previous 3.4 percent.
    Growth in the fourth quarter is estimated to have improved from third quarter's 0.7 percent expansion and for the entire 2013 year, SARB estimated growth of around 1.9 percent.
    A trade surplus of 800 million rand in November may signify a narrowing of the current account deficit in the fourth quarter, but Marcus said it was still too early to assess whether this indicated a trend. The duration of strikes in the mining sector, and the resulting decline in exports, is likely to impede a further improvement in the current account deficit.
    In the third quarter of last year, South Africa's current account deficit amounted to 23.27 billion rand, or 6.8 percent of Gross Domestic Product - the biggest gap in five years - and up from 5.9 percent in the second quarter.


Post a Comment