South Africa Reserve Bank’s Policy Options Remain Limited

The South African Reserve Bank is running out of options to stimulate a sluggish economy as a weaker rand this year keeps pressure on inflation.

The Monetary Policy Committee, led by Governor Gill Marcus, will probably keep the benchmark interest rate unchanged at 5 percent today, according to all 22 economists surveyed by Bloomberg. Marcus is due to announce the decision at a press conference that begins at about 3 p.m. in the capital, Pretoria.

Marcus, 64, is facing conflicting policy choices after the rand’s 17 percent slump against the dollar this year boosts import costs of everything from oil to food. That’s limiting the room policy makers have to spur consumer spending and growth in Africa’s largest economy.

“The bank still sits with the same kind of pressures they had last time, which is on the one hand a fairly weak economy, which should argue for easing, yet there are inflation risks,” Adenaan Hardien, chief economist at Cadiz Holdings Ltd. in Cape Town, said in a phone interview yesterday.

Investors have scaled back bets of interest-rate increases after the statistics office said yesterday inflation slowed to 5.5 percent in October from 6 percent in the previous month. That was lower than the 5.7 percent median estimate of 23 economists surveyed by Bloomberg.

Forward-rate agreements starting in 12 months, used to lock in borrowing costs in the period, fell 12 basis points yesterday to 6.08 percent, the lowest since Oct. 31. The yield on one-year interest rate swaps dropped eight basis points, or 0.08 percentage points, to 5.37 percent.

Flat Rates

The rand gained as much as 1.3 percent to 10.0520 against the dollar yesterday and was trading at 10.1596 as of 9:36 a.m. in Johannesburg.

While the improvement in inflation last month won’t change the dilemma faced by the Reserve Bank “it certainly eases some of the pressure on the bank,” Mohammed Nalla, head of strategic research at Nedbank Group Ltd. said by phone from Johannesburg yesterday. “Rates are likely to remain flat for an extended period of time and the time frame for the eventual hike is pushed out even further.”

Marcus said in September inflation will probably average 5.9 percent this year and 5.8 percent in 2014, close to the top of the central bank’s 3 percent to 6 percent target band.

Policy makers are unlikely to use other tools at their disposal -- such as boosting money supply or reducing commercial banks’ cash limits -- to influence borrowing rates in the economy, said Hardien.

‘Blunt Instrument’

“The Reserve Bank has shown that it’s not really prepared to consider quantitative measures, and the only other blunt instrument is interest rates,” he said.

Finance Minister Pravin Gordhan is forecasting economic expansion of 2.1 percent this year compared with 2.5 percent in 2012 as export demand from Europe slowed and strikes from mining to construction disrupted production. Statistics South Africa will publish third-quarter gross domestic product data on Nov. 26.

While interest rate cuts may help to spur spending, the Reserve Bank doesn’t have control over low consumer and business sentiment, said Elize Kruger, an economist at Johannesburg-based KADD Capital. The FNB/BER consumer confidence index stayed close to a decade low of minus seven in the fourth quarter, First National Bank said on Nov. 18. Retail sales growth slowed to 0.2 percent in September, the weakest expansion in four years, from 3.2 percent in the previous month, the statistics agency said on Nov. 13.

“If a 50 basis point rate cut could have done it, the bank would probably have tried it already,” Kruger said by phone yesterday. “The government can do certain things, like implementing capital projects which are already planned and by spending capital budgets.”

To contact the reporters on this story: Rene Vollgraaff in Johannesburg at rvollgraaff@bloomberg.net; Mike Cohen in Cape Town at mcohen21@bloomberg.net

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

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