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South Africa Keeps Lending Rate at 5% on Price Pressures

Sept. 20 (Bloomberg) -- South Africa’s central bank kept its benchmark interest rate unchanged as rising food and fuel costs limit the room policy makers have to stimulate growth in Africa’s biggest economy.

The Monetary Policy Committee left the repurchase rate at 5 percent, Governor Gill Marcus told reporters today in Pretoria, the capital. That was in line with the forecasts of 19 of 20 economists surveyed by Bloomberg.

Inflation threats are rising with record food prices, prompting central banks from Russia to Canada to warn of tighter monetary policy. After reducing borrowing costs for the first time in 20 months in July to support the economy, the Reserve Bank is focusing on price stability to keep inflation inside the 3 percent to 6 percent target range.

“A further reduction in the repo rate is not appropriate at this stage,” Marcus said. “This accommodative stance is assessed to be consistent with the bank’s price stability mandate and conducive to encouraging growth and domestic investment.”

Inflation quickened for the first time in four months in August to 5 percent from 4.9 percent in the previous month, the statistics office said yesterday. The bank raised its forecast for inflation to 5.2 percent for 2013, from 5.1 percent at its July 19 meeting.

Rate Swaps

Investors have been reducing bets the Reserve Bank will cut borrowing costs again this year, with the yield on the two-year interest-rate swap, used by traders to lock in borrowing costs over that period, increasing 10 basis points since July 20.

“There are lots of worries about the rand, oil and food prices,” Johann Els, an economist at Old Mutual Investment Group, South Africa’s largest private money-manager, said in a phone interview from Cape Town. “They are still very worried about the impact the global economy will have on South Africa.”

Exports slumped in the second quarter as global demand waned, widening the current account deficit to the most in almost four years and adding to pressure on inflation. The shortfall on the current account, the broadest measure of trade in goods and services, reached 6.4 percent of gross domestic product in the period.

“The exchange rate poses a potential risk to the inflation outlook, particularly in the event of an unsustainable widening in the current account of the balance of payments,” Marcus said.

Weaker Rand

The rand has dropped 7.5 percent against the dollar in the past year, the second worst-performer of 16 major currencies tracked by Bloomberg. The rand was little changed at 8.3573 per dollar as of 4:03 p.m. in Johannesburg from 8.3559 before Marcus began speaking.

The Reserve Bank cut its forecast for economic growth this year to 2.6 percent from 2.7 percent and predicted expansion of 3.4 percent in 2013, Marcus said.

The steps taken by policy makers in the past week in the U.S. and Japan to buy bonds and boost liquidity have alleviated some of the concerns regarding the global economic outlook, though there are still risks of slower growth, Marcus said.

“There wasn’t enough deterioration between July and September” in the growth outlook for the bank to cut, Gina Schoeman, an economist at Absa Group Ltd. in London, said in a telephone interview. “They are happy to let the advanced economies do the heavy lifting.”

Higher food prices, such as wheat and white corn, will add to pressure on inflation, Marcus said. Corn reached a record $8.49 a bushel on the Chicago Board of Trade on Aug. 10 and white corn, a staple in South Africa, has gained 19 percent since June 1 on the South African Futures Exchange.

“These increases are expected to filter through to domestic consumer prices in coming months,” Marcus said. “Some upside pressure is still expected from food and petrol price increases.”

To contact the reporters on this story: Andres R. Martinez in Johannesburg at amartinez28@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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