In The News
Repo rate remains the same for now
Date posted: 06 Dec 2012
The Monetary Policy Committee (MPC) of the South African Reserve Bank last week held
its latest meeting to determine the current level of local interest rates. It decided to leave the
repo rate unchanged at its current 5% per annum. As usual, the MPC considered a wide array
of factors, before reaching its decision. And a quick review of a few of those factors will
give us insights into current trends and possible future directions in the level of interest rates.
The MPC noted that consumer price inflation had increased slightly, to 5.6%, in October.
This has been strongly influenced by recent food price increases. Furthermore, the MPC
believes that the recent depreciation in the value of the rand will lead to a 5.7% peak in
inflation early next year. In concluding that the upside risks to inflation have increased the
MPC also referred to a deterioration in the South African growth outlook, and labour market
instability.
This instability has led to work stoppages, reduced output and declining export volumes.
This in turn has widened the deficit on the current account of our country’s balance of
payments. Coupled with ratings downgrades by 2 ratings agencies, the inevitable result has
been the decline in the value of our currency. But as is often the case, large purchases by
foreigners of South African bonds (R85 billion worth so far this year) have had a supportive
effect.
And although the growth and inflation outlooks have slightly worsened, the MPC did not
increase interest rates. Why not? While inflationary pressures are due to external factors
(like global food prices) and currency depreciation, expenditure by local consumers is
actually moderating, and demand pressures on local inflation are benign. And given risks to
the growth outlook, the MPC referred to its current accommodative (i.e. low rate) stance, as
appropriate.
That’s a very potted summary of the MPC’s statement. Even in the full document, the MPC
typically doesn’t speculate on the likely future direction of local interest rates, so it’s left to
us to offer some thoughts about the “Where to from here?” Our assessment of all the factors
referred to by the MPC is that the weak growth and moderate inflation environment will
remain in place for some time, leaving rates low for now, until the next probably-upwards
move.
When that will be is hard to forecast, but seems unlikely until well into next year, at the
earliest.
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