South African Reserve Bank Keeps Benchmark Rate Unchanged

The South African Reserve Bank kept its benchmark interest rate unchanged for a seventh meeting as a rebound in the rand allowed policy makers to focus on fostering growth in Africa’s largest economy.

The Monetary Policy Committee left the repurchase rate at 5 percent in a unanimous decision, Governor Gill Marcus told reporters today in Pretoria, matching the forecasts of all 20 economists surveyed by Bloomberg.

The rand’s recovery from a four-year low against the dollar on Aug. 28 has given policy makers room to keep borrowing costs unchanged even as inflation exceeded the bank’s 3 percent to 6 percent target band for a second month in August. Marcus said that breach will probably be temporary, enabling the Reserve Bank to help foster growth in an economy that’s set to expand this year at the slowest pace since a 2009 recession.

“We are still firmly in neutral mode in monetary policy,” Elize Kruger, an economist at KADD Capital in Johannesburg, said in a phone interview. “I doubt they will move preemptively in this current cycle because economic growth is still below potential growth. They are going to have to give the economy more time to recover before thinking of hiking rates.”

The central bank kept its average inflation forecast for this year unchanged at 5.9 percent, while raising next year’s projection to 5.8 percent from 5.5 percent, and predicting 5.4 percent in 2015. Inflation accelerated to 6.4 percent in August from 6.3 percent in the previous month, in line with the median estimate of 23 economists surveyed by Bloomberg survey.

Rand Gains

While the rand slumped 18 percent against the dollar in the first eight months of the year, pushing up fuel and food prices, the currency surged 6.8 percent since the start of September, curbing inflation expectations.

The rand weakened 1 percent to 9.6819 per dollar as of 6:16 p.m. in Johannesburg, compared with 9.6276 before Marcus began speaking. The yield on 13-year bonds bonds fell 24 basis points to 7.91 percent.

“A sustained breach of the inflation target is not our central forecast but the upside risks to the inflation outlook require careful monitoring,” Marcus said. “The risks to the inflation outlook from the exchange rate remain elevated and dependent on its future trend. A sustained depreciation trend could pose a significant risk.”

Inflation Expectations

The benchmark rate has remained unchanged at the lowest level in more than 30 years since July 2012 to spur economic growth. The central bank expects the economy to grow 2 percent this year, 3.3 percent in 2014 and 3.6 percent in the following year, the same as it forecast two months ago.

“Manufacturing output is expected to be adversely affected by protracted strikes, particularly in the motor vehicle sector,” Marcus said.

The MPC said while there are some signs that the depreciation of the rand this year is starting to boost producer prices, the impact of the weaker currency on inflation has been muted due to low demand in the economy and an inability of retailers to pass on higher prices to consumers. A 10 percent fall in the currency usually adds 2 percentage points to the inflation rate, according to the central bank.

Inflation expectations are little changed, according to a survey conducted on behalf of the Reserve Bank by the Bureau for Economic Research. Financial analysts, business executives and labor union officials predict the inflation rate will average 6.2 percent in 2014, compared with 6.1 percent estimated in the second quarter, the bureau said in a statement today.

“Should the risks to the medium-term inflation outlook deteriorate significantly, the MPC will not hesitate to take appropriate action in order to maintain the integrity of the inflation-targeting framework and to anchor inflation expectations at a lower level,” Marcus said.

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