SA Interest Rates March 2011

The SA Reserve Bank opted to leave the Repo rate unchanged at 5.50%. That was in line with the forecasts of all 23 economists surveyed by Bloomberg. The Reserve Bank last adjusted interest rates on 18 November 2010, when they cut rates by 50bps. Following the Reserve Bank decision, the prime interest should remain unchanged at 9.0%, which is the lowest prime rate South Africa has experienced since April 1974.

This is the second MPC meeting for the year.

It is useful to note that the Reserve Bank has again upwardly revised its inflation forecast. Back in November 2010 the Reserve Bank expected inflation to average 4.3% in 2011 and 4.8% in 2012. In January 2011, they increased the forecast up to an average of 4.6% in 2011 and 5.3% in 2012. They have now increased the forecast further to 4.7% in 2011 and 5.7% in 2012. The upward adjustment is mainly due to revised assumptions relating to the international oil price.

In making the decision to leave rates unchanged, the Reserve Bank highlighted the following key factors:

Growth outlook:

• The domestic growth prognosis has improved, and the recovery is expected to be sustained, although not at rates sufficient to make appreciable inroads into the unemployment situation in South Africa.
  
  
• Household consumption expenditure has been the main driver of growth, whereas growth in fixed capital formation has remained weak.
  
  
• There are indications that although consumption expenditure growth will remain relatively robust, it is unlikely to accelerate to excessive levels in the short term; constrained to some extent by the continued high levels of household indebtedness.
  
  
• The forecast of the Bank has increased somewhat since the previous meeting of the MPC, with GDP now expected to average 3.7% and 3.9% in 2011 and 2012 respectively.

• The global inflation outlook has rather deteriorated in the face of higher oil and food prices, although in some of the advanced economies there is a marked divergence between core and headline inflation. This reflects the relatively weak underlying demand conditions, and the generally accommodative monetary policies in these countries.
  
  
• In the faster growing emerging markets, inflation pressures are more pronounced, and monetary policy tightening has become more widespread.
  
  
• The risks to the outlook for SA domestic inflation have increased on the upside, mainly as a result of cost push pressures.
• The biggest risks to the inflation outlook remain food and administered prices as well as oil prices.
  
  
• High real wage settlements have been a significant upside risk to the inflation outlook. However, there are indications that nominal wage settlement rates may be moderating.
  
  
• At this stage there are no discernible inflationary pressures coming from the demand side of the economy.
  
  
• Given the significant upside risks to the inflation outlook, the MPC will closely monitor any indications of second round effects on inflation emanating from these cost pressures.

In the past six months the attention of the MPC has shifted from encouraging growth to highlighting concerns about inflation. These risks appear to be mostly confined to the higher oil/fuel price, as well as higher food prices. While these pressures are cost-push in nature and internationally driven, the Reserve Bank has indicated that they will monitor the extent to which these price hikes are reflected in a broader increase in inflation. The decision by the Bank to revise up its inflation forecast is appropriate under current circumstances.

Based on the latest inflation data as well as the most recent MPC statement, we expect interest rates to remain on hold for most of 2011, with the first rate hike possible in the final quarter of 2011.