South Africa Holds Rate, Growth Worsens And Inflation Rises

CentralBankNews
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    South Africa’s central bank held its benchmark repurchase rate steady at 5.0 percent, as expected, balancing upward pressure on inflation against downside risks to economic growth. The bank cut its growth forecasts and raised inflation forecasts.

    The South African Reserve Bank (SARB), which has cut rates by 50 basis points this year, struck a somber tone in its statement and said there had been a marked change in the domestic landscape that have affected the country’s economic outlook and confidence.

    Labour unrest and and a sharp fall in mining output has aggravated the domestic impact of the global economic slowdown, threatening to “derail the progress made to date whereby South Africa has been able to withstand the worst contagion effects of the ongoing global crisis,” the bank said after a meeting of its Monetary Policy Committee.

    The central bank appealed to employers and workers to improve their “fraught “relations and stressed its “concern about the conduct of some of the parties involved in the recent labour market instability and, in particular, the unacceptable levels of violence that have accompanied the strikes.”

    “While many of the strikes appear to have been resolved, long term resolution of the underlying causes requires ongoing, concerted action on the part of all the parties involved.  We need cohesion and certainty of policy, as well as unity of purpose to build an inclusive, longer-term vision.”

    The SARB trimmed its forecast for 2012 Gross Domestic Product growth to 2.5 percent from a previous 2.6 percent, but cut the 2013 forecast to 2.9 percent from 3.4 percent. Forecasts for 2014 GDP growth were cut to 3.6 percent from 3.8 percent.

    Noting that risks remain to the downside, the central bank also said data indicated that third quarter growth was well below the second quarter’s 3.2 percent, with mining output down 3.2 percent in the quarter and should contract further in the fourth quarter.

    South Africa’s GDP rose by 3.2 percent in the second quarter from the first quarter, for an annual rate of 3.0 percent.

    The outlook for inflation has also deteriorated, the bank said, due to continued upward pressure on food prices, a depreciation in the rand currency and a reweighting and rebasing of the consumer price index.

    “Furthermore, the possible impact of higher wage increases could exert further upward pressure on inflation notwithstanding the concerns that recent developments in the labour market could impact negatively on employment. The MPC considers that the demand pressures on inflation at this stage remain relatively benign, as evidenced in the contained trend of underlying inflation,” the SARB said.

    South Africa’s inflation rate ticked up further in October to 5.6 percent, the fourth consecutive monthly rise, approaching the upper end of the central bank’s 3-6 percent target range.

    The bank now expects inflation to average 5.6 percent in 2012, 5.5 percent in 2013, up from a previous forecast of 5.2 percent, and 5.0 percent in 2014, unchanged, with a peak of 5.7 percent in the first quarter of 2013.

    These forecasts, however, do not reflect the new CPI weights and rebasing, and the central bank said this could shift its central inflation projection upward by 0.2 percentage points in 2013.

     Another reason for the higher inflation forecasts is the decline in the rand, which has has depreciated by about 6.7 per cent against the US dollar, by 5.8 per cent against the euro, and by 5.8 per cent on a trade-weighted basis since the bank’s September meeting.

    “The MPC considers that the demand pressures on inflation at this stage remain relatively benign, as evidenced in the contained trend of underlying inflation. There are also signs of moderation of consumption expenditure against the backdrop of a weak supply side of the economy. The negative output gap is expected to persist for some time, and the balance of risks to the growth outlook remains on the downside.”

 

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