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Repo rate unchanged at 5.75%: Sizwe Nxedlana – chief economist, FNB

Lesetja Kganyago ‘treaded a very careful line’.

SIKI MGABADELI: The MPC decided to keep interest rates unchanged today. That’s what most economists had expected. I haven’t actually spoken to anyone who expected a rate increase, but some people had kind of been hinting, hoping for a rate cut, given that CPI was within the target band, and producer prices also on a downward trend. You saw the December PPI data that came out today as well. And GDP growth of course needs a helping hand.
   Sizwe Nxedlana is chief economist with FNB and joins us now. Sizwe, thanks for your time this evening. David seems to think Lesetja Kganyago sounded a little hawkish. What did you think today?

SIZWE NXEDLANA: I think the tone of his assessment was pitched just right. He treaded a very careful line and he seems to be suggesting more pausing rather than opening the door for any interest-rate cuts, because I think maybe some people in the market were perhaps starting to get a little bit ahead of themselves. But at the same time he also I don’t think emphasised any bias towards interest-rate hikes. So I think, to the extent that the oil price stays where it is, even increases just slightly, we are probably in for a long period of no change in interest rates. And I think under the conditions it’s probably the best thing for the South African Reserve Bank to do.

SIKI MGABADELI: OK. Let’s take a look at what’s changed since their previous meeting. He spent some time looking at key indicators and where things had actually improved and where things might have deteriorated.

SIZWE NXEDLANA: There’s been a significant improvement in the SARB’s forecast for inflation. At the last MPC meeting they were expecting inflation to be 5.3% for 2015, predominantly because of the impact of lower oil prices on the petrol price within the CPI basket. They’ve reduced that 2015 inflation forecast to 3.8%.
   The problem is that the SARB seems to be indicating that that oil windfall impact on inflation is possibly temporary for two reasons. One is the basis set. So even if very little happens to the oil price, because of the low basis set that’s set now, this time next year inflation goes up. And if the oil price increases by more than what’s being anticipated, then this positive impact on inflation of the oil price unwinds quite quickly next year. So on a look-through basis I think from a monetary policy perspective, unless you are certain oil is not going to be problematic and will remain where it is or even lower maybe this year and next, I think it’s prudent to err on the side of caution and rather stay out of the way.

SIKI MGABADELI: Ja. And the MPC, Sizwe, also seems to be quite uncomfortable with how close inflation and inflation expectations are to the upper end of the target band.

SIZWE NXEDLANA: I think that’s just almost buying insurance to substantiate not moving and possibly signalling the fact that they’d prefer not to move this year. They also said that the bar is very high for any further accommodation – in other words, that a lot would have to happen to the oil price. And also a lot would have to happen in terms of core inflation – in other words, secondary-round positive impacts of this low oil price on core inflation and on inflation expectations for them to then cut rates.
   So for me it seems like it’s signalling an extended unchanged environment rather than hawkish or extremely dovish.

SIKI MGABADELI: Thanks to Sizwe Nxedlana.
   So David, no rate cuts any time soon. So I’m not going to be paying less for my bond any time soon.

DAVID SHAPIRO: That’s exactly what Lesetja said. The bar is high and I think we are going to need a long, extended period of declines in the oil price for them to do anything from that. So that’s fine. We are still in the low end.

SIKI MGABADELI: It’s not fine.

DAVID SHAPIRO: The market didn’t react. Retail shares keep going up. If you listen to what he said about the petrol price, it has lost R3/litre I think since he first started.

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