PRETORIA – The South African Reserve Bank (Sarb) has kept the repo rate at 5.75%, amidst a lower near-term inflation outlook off the back of falling oil prices globally.
Reserve Bank Governor, Lesetja Kganyago said the inflation and growth benefits of a low oil price would be temporary and the Sarb’s forecast made provision for a moderate increase in the price of oil over the next two years.
Kganyago said that inflation was now expected to average 3.8% in 2015, compared with a previous forecast of 5.3%. Core inflation would average 5.5% and 5.1% in 2015 and 2016, respectively, from 5.7% and 5.3% previously.
Figures from Statistics South Africa earlier this month revealed that headline consumer price inflation (CPI) in December fell to 5.3% (November: 5.8%) from peaks of 6.6% in May and June.
Core inflation, which excludes the price of food, petrol and electricity, remained near the upper end of the inflation target range, moderating to 5.5% in December 2014, from 5.8% previously.
Kganyago said it was “too early” to assess if inflation was going to continue its downward trend and that it was still uncomfortably close to the upper end of the target range.
Chief economist at the SA Institute of Race Relations, Ian Cruickshanks, said the Sarb’s decision was “not unexpected at all” and that lower oil prices were here to stay for some time. Cruickshanks did not expect rates to be revised downward, however, due to the risk of capital flight.
Lower oil prices
Kganyago maintained that the outlook for international oil prices was “highly uncertain” and their impact on the inflation trajectory would dissipate over time. Rand weakness posed an upside risk to the inflation outlook and the currency was vulnerable to the pace and extent of monetary policy normalisation in the US.
A weak rand would to some extent erode the positive benefits of the lower oil prices on inflation, while wage increases in excess of productivity growth were another upside risk to the inflation outlook. Kganyago said the outcome of this year’s public sector wage settlements would have an important bearing on wage settlements in the economy going forward.
“Overall risks to the inflation outlook are more or less balanced, with no evidence of excess demand pressures on inflation,” Kganyago said.
The domestic ecoomic growth outlook remained subdued and the Sarb expected GDP growth for 2014 to average 1.4%, with at least one percentage point lost to work stoppages.
Emerging market growth
Lower commodity prices have put growth in emerging markets under pressure, leading the International Monetary Fund (IMF) to revise downward its global growth expectations for 2015 by three percentage points to 3.5%. Notable downward growth revisions have been made for Brazil, China, Mexico, Nigeria and Russia, with growth in China expected to moderate to 6.8% this year from 7.4% in 2014.
While the US Federal Reserve has indicated it will begin hiking rates in the second half of this year, Kganyago said that market expectations were that US rate hikes might come later – due to low inflation – and that when they did begin they would be gradual.
The impact of stimulus measures from the European Central Bank (ECB), meanwhile, which last week announced it would pump €60 million a month into the currency area’s economy from March to September 2016, would not be as pronounced on the rand as the US’s quantitative easing was, Kganyago said.
“In the short run, electricity constraints and work stoppages are the biggest constraints on growth,” said advisor to the governor, Kuben Naidoo. In the longer term, Naidoo said that transport costs, education and the ability to import skilled labour were among risks to the growth outlook. “Even if those are tackled now, you will see longer term growth rise, but you may not see shorter term growth rise, particularly because of the binding constraints of electricity shortages,” Naidoo said.