South Africa Holds Key Rate as Weak Rand Prevents Stimulus

South Africa’s Reserve Bank kept its benchmark interest rate unchanged for a second meeting as a weak rand and rising food and fuel prices prevented policy makers from stimulating the economy.

The Monetary Policy Committee left the repurchase rate at 5 percent, Governor Gill Marcus told reporters today in Pretoria, the capital, matching the forecasts of all 23 economists surveyed by Bloomberg. The decision was unanimous and there was no discussion of raising or lowering borrowing costs, she said.

Since a surprise rate cut in July, Marcus has tempered expectations of further reductions as the rand’s depreciation adds to pressure on inflation. The currency dropped yesterday below 9 per dollar for the first time since April 2009, threatening the central bank’s 3 percent to 6 percent target. That’s limiting the central bank’s ability to stimulate an economy that’s set to expand at its slowest pace since a recession three years ago.

“The rand is expected to remain volatile and subject to overshooting and its depreciation poses an upside risk to the inflation outlook,” Marcus said. “The domestic economic growth outlook has deteriorated recently, largely as a result of the continued global slowdown and aggravated by domestic events.”

Growth Slows

The rand fell to 8.9506 per dollar as of 4:12 p.m. in Johannesburg from 8.9464 before Marcus began speaking. The yield on the rand debt due in 2021 rose 1 basis point to 6.66 percent today.

Central banks from Hungary to Israel to the Czech Republic have cut interest rates in the past two months to stimulate their economies as global growth wanes. Africa’s biggest economy is set to expand 2.5 percent this year, lower than a previous estimate of 2.6 percent, Marcus said.

Inflation accelerated to a four-month high of 5.6 percent in October as vegetable prices surged 9.5 percent in the month, the statistics office said yesterday. Gasoline costs jumped 15 percent in the first 10 months of the year.

The central bank raised it forecast for inflation to an average 5.5 percent next year from 5.2 percent previously, Marcus said. The inflation rate will peak at 5.7 percent in the first quarter and average 5 percent in 2014, she said.

Inflation Target

The rand has plunged 9.9 percent this year against the dollar, the second-worst of the 16 major currencies tracked by Bloomberg. Every 1 percentage point drop in the rand adds as much as 0.2 percentage points to inflation, according to Standard Bank Group Ltd.

“The exchange rate depreciation does put pressure on your inflation outlook,” Madalet Sessions, an economist at Nedbank Group Ltd. in Cape Town, said in a telephone interview. “The rand, food and oil are all supply-side issues.”

Investors are boosting bets inflation will remain near the top of the bank’s target range as changes to the consumer price basket next year will give more weighting to electricity and gasoline prices. The yield-gap on fixed-rate debt due in 2017 and similar maturity bonds linked to inflation rose 30 basis points in the past month to 5.82 percent.

Rising wage demands are adding to pressure on inflation, Marcus said. Lonmin Plc gave workers pay increases of as much as 22 percent to end a six-week strike at its Marikana mine in August, prompting labor unrest at mines owned by AngloGold Ashanti Ltd. and Gold Fields Ltd. as workers pushed for higher wages.

Rating Downgrades

“The MPC is concerned about the recent trend in wage settlements and the potential for negative impacts on the economy, particularly on growth and investment,” Marcus said. “There is no doubt that the increases granted are well above inflation.”

Since the last MPC meeting, domestic conditions have dominated central bank concerns, Marcus said. More than 46 people died in clashes at Marikana in the worst mining violence since the end of apartheid. Moody’s Investors Service and Standard & Poor’s lowered South Africa’s sovereign credit rating since then as the growth outlook deteriorated.

The MPC cut its growth forecast for next year to 2.9 percent from 3.4 percent and projects the economy will expand 3.6 percent in 2014.

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