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In late March, the South African Reserve Bank (SARB) kept its interest rates on hold at 5.5% after its latest Monetary Policy Committee (MPC) meeting. But the decision was not unanimous, with four members voting to keep rates on hold while three wanted rates hiked. Reserve Bank Governor Gill Marcus said the MPC had an acute awareness of rising inflation in a subdued economic environment. The decision to hold followed the 50 basis point hike to 5.5% in January.
0.1 Bank less upbeat on growth
The MPC said the economy was fragile and the bout of protracted platinum sector strikes, uncertainty in electricity supply and slow consumption were weighing on growth expectations. SARB forecasts for 2014 were cut from 2.8% to 2.6% and for 2015 from 3.3% to 3.1%.
0.2 Inflation expectations
The MPC said inflation had been rising in recent months and it expected this to continue, breaching the upper target band of 6% in the third quarter and peaking at 6.3% in the final quarter of 2014. It said there was greater need to contain future inflation and better understand when and how the weakening of the Rand would feed through into higher consumer and retail prices.
Although the Rand remains weak, it is 2.4% stronger against the dollar than in January, when it was at a 5 year low. Economists believe the improvements in the Rand and sluggish domestic economic conditions lessened the impetus for any rate hike at this meeting.
0.3 More policy tightening on the way
Marcus said clearly that interest rates were now on an upward path, making the MPC’s forward plans clearer than after the January meeting. She said that recent market expectations of a quicker than originally expected Federal Reserve tightening would have implications for the Reserve Bank’s own normalisation cycle. There would be a prudent cycle of upward adjustments in the interest rate in the future, as a “pro-growth policy intervention”. Marcus noted the subdued economic outlook in other members of the BRICS and said these would be considered in the MPC’s calculations.
Before the meeting, economists believed SA was at the start of a tightening cycle, but were unsure at the pace at which it would be implemented. The MPC made clear it was aiming for a smooth path, but that actions by the Federal Reserve and inflation pass through would have important impacts on the pace and extent of hikes. Economists are now expecting a rate hike at the next MPC meeting, in late May – the question is whether it will be 25 or 50 basis points.
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