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South Africa Central Bank Keeps Benchmark Interest Rate Unchanged at 6.5%
South Africa’s Reserve Bank kept its benchmark interest rate unchanged for a second meeting as consumer spending recovered from last year’s recession and wage costs surged.
The repurchase rate was left at 6.5 percent, Governor Gill Marcus said in Pretoria today. That was in line with the forecast of 18 of 26 economists surveyed by Bloomberg.
Seven interest rate cuts since December 2008 and inflation at its slowest pace in four years have helped to spur consumer spending and growth in Africa’s biggest economy. Marcus resisted calls from labor unions and exporters to cut interest rates again today as the World Cup, which ended on July 11, fueled wage demands and pushed up prices of hotel rooms, flights and restaurant bills.
“Given how the risks stacked up, this was the right decision,” said Johan Rossouw, an economist at Vunani Securities in Cape Town. “There are significant labor cost pressures out there and we’re seeing a recovery in consumer spending. Inflation will bottom soon and it will be increasingly difficult to cut interest rates further.”
Retail sales gained for a fifth consecutive month in May, increasing 4.6 percent from a year ago, the statistics office said on July 14. The economy expanded an annualized 4.6 percent in the first quarter as manufacturing and mining exports rebounded.
‘Bitterly Disappointed’
The Congress of South African Trade Unions, the country’s biggest labor federation, said it is “bitterly disappointed” at Marcus’s decision. “The MPC has missed yet another opportunity to save and create jobs by giving a boost to investment and growth,” it said in an e-mailed statement.
Money market futures rose from a record low today as investors reduced bets the central bank will cut rates in September. Forward-rate agreements showed that contracts for three-month cash due in three months rose 8 basis points to 6.28 percent as of 4:58 p.m. in Johannesburg.
“The door for an interest rate cut is not entirely shut,” said Danelee van Dyk, an economist at Standard Bank Group Ltd., Africa’s biggest lender. “There needs to be downside surprises in growth and inflation, or significant rand strength, to tip the scales in favor of a rate cut.”
Growth Outlook
The growth outlook weakened in the second quarter, while inflation is expected to moderate, Marcus said. The statistics office will publish last quarter’s growth data in August.
“Indications are that second quarter growth was likely to have been less favorable and the negative output gap is expected to persist for some time,” Marcus said. “The committee is aware of the fragilities and vulnerabilities to the domestic economy, driven in part by global uncertainties.”
The bank expects the economy to expand 2.9 percent this year, compared with a 1.8 percent contraction in 2009.
Inflation, which reached 4.6 percent in May, will stay inside the 3 percent to 6 percent target until the end of 2012, Marcus said. The inflation rate will probably average 4.5 percent in the third quarter and “increase moderately thereafter,” with the bank’s inflation forecast remaining unchanged from the previous meeting, she said.
“The outlook remains favorable, with inflation expected to remain within the inflation target range for some time, against a backdrop of a benign global inflation environment,” Marcus said.
Wage Costs
Rising wage and administered prices, such as electricity prices, are the “main upside risks to the inflation outlook,” Marcus said. Transnet Ltd., the state-owned rail and ports company, agreed to increase workers’ pay by 11 percent in May to end an 18-day wage strike that curbed exports. Teachers, nurses and other government workers may go on strike next week to demand a pay increase of 8.6 percent, a labor union said yesterday.
“By September we believe the Reserve Bank will be surprised to the upside by both growth and inflation as the recovery takes hold further and so we see no opportunity for a cut at that time,” Peter Attard Montalto, an economist at Nomura Plc in London, said in a note to clients.
To contact the reporters on this story: Nasreen Seria in Johannesburg at nseria@bloomberg.net; Franz Wild in Johannesburg at fwild@bloomberg.net
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