South Africa Holds Rate as Rand Sparks Inflation Fears

South Africa’s Reserve Bank kept its benchmark interest rate unchanged for a third meeting as a weaker rand threatens to boost inflation, making it difficult for policy makers to stimulate a flagging economy.

Members of the Monetary Policy Committee unanimously agreed to leave the repurchase rate at 5 percent, Governor Gill Marcus told reporters today in Pretoria, the capital, matching the forecasts of all 21 economists surveyed by Bloomberg.

“The monetary policy stance remains accommodative and appropriate,” Marcus said. “Further accommodation at this stage is constrained by the upside risks to the inflation outlook,” which include the currency and higher wages.

Rising wages and the currency’s slump to a four-year low beyond 9 rand to the dollar is adding to price pressures as inflation nears the top of the central bank’s 3 percent to 6 percent target. That’s limiting policy makers’ ability to support the economy and help offset the effect of mines strikes and firings that may worsen a 25.5 percent unemployment rate.

The rand has dropped 6.4 percent against the dollar since the beginning of the year, the worst performance of 16 major currencies tracked by Bloomberg. It traded at 9.0555 a dollar as of 4:49 p.m. in Johannesburg, down from 9.041 when Marcus announced the rates decision.

Every 1 percentage decline in the rand adds as much as 0.2 percentage points to inflation, according to Johannesburg-based Standard Bank Group Ltd. (SBK) Inflation accelerated to a seven-month high of 5.7 percent in December, the statistics office said yesterday.

‘Wage Spiral’

“We don’t believe that it will cut rates again in this cycle,” Elna Moolman, an economist at Johannesburg-based Renaissance Capital, said in an e-mail. “This is owing to upside risks to the inflation forecasts and the bank’s concerns about a possible wage price spiral.”

The central bank raised its forecast for average inflation for this year to 5.8 percent from 5.5 percent, while lifting it to 5.2 percent in 2014 from 5 percent previously. Inflation will probably peak at 6.1 percent in the third quarter of this year, Marcus said.

Workers on South African mines won wage increases of as much as 22 percent last year after a series of strikes. Farmworkers in Western Cape province staged intermittent work stoppages since November, demanding that the minimum daily wage be more than doubled to 150 rand ($16.55).

Growth Slows

“The MPC is mindful of the danger of a possible wage-price spiral and further employment losses should unaffordable real wage demands be granted while economic growth remains constrained,” Marcus said.

Economic growth will probably reach 2.6 percent this year, down from a November estimate of 2.9 percent. The bank raised its forecast for next year to 3.8 percent from 3.6 percent.

“Domestic economic growth remains fragile and below potential,” the governor said. “The outlook for parts of the mining sector is bleak, following continued labor disputes and announcements of possible closures of shafts and mines, a consequence of increased cost pressures, weak global demand and prices.”

The International Monetary Fund yesterday cut its growth forecast for this year to 2.8 percent from 3 percent, lower than the government’s projection of 3.6 percent.

Twelve-month forward-rate agreements, used to speculate on interest rates, rose 5 basis points today to 5.12 percent.

The bank “is sounding more hawkish than previously,” Razia Khan, the London-based head of Africa economic research at Standard Chartered Plc, said in e-mailed comments. “The Reserve Bank is unlikely to react to any temporary breach of the inflation target, especially one driven primarily by supply-side factors. But there is little doubt, with the emphasis on the wage-price spiral and the rand, that inflation risks are now thought of differently.”

To contact the reporters on this story: Mike Cohen in Cape Town at mcohen21@bloomberg.net; Franz Wild in Johannesburg at fwild@bloomberg.net

To contact the editor responsible for this story: Nasreen Seria at nseria@bloomberg.net

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