South Africa’s Reserve Bank kept its benchmark interest rate unchanged, while indicating it may move borrowing costs higher as a weaker rand threatens to fuel inflation.
The Monetary Policy Committee left the repurchase rate at 5 percent, Governor Gill Marcus told reporters in Pretoria today, matching the forecasts of all 22 economists surveyed by Bloomberg.
Policy makers have kept borrowing costs at a three-decade low for more than a year to help support an economy that’s set to expand this year at the slowest pace since a 2009 recession. While inflation slowed last month and the central bank lowered its price projections, MPC members spent “considerable time” discussing raising interest rates in the face of inflation threats, Marcus said.
“The message coming from the Reserve Bank very clearly was that they spent more time talking about an interest rate hike rather than a cut,” Kevin Lings, chief economist at Johannesburg-based Stanlib Asset Management Ltd., said in a phone interview. “Gill Marcus specifically said even though inflation has done better, the risks to inflation are to the upside.”
The MPC lowered its inflation forecast for this year to an average of 5.8 percent compared to a previous estimate of 5.9 percent, and cut next year’s projection to 5.7 percent from 5.8 percent, Marcus said. Consumer prices rose 5.5 percent in October from a year ago, remaining inside the central bank’s 3 percent to 6 percent target band.
“The South African Reserve Bank’s mandate is to target inflation and if we think inflation is rising and inflation expectations are being unhinged, we certainly would have no hesitation to hike rates,” committee member Kuben Naidoo said.
While the Reserve Bank lowered its inflation forecast, it “retained caution with regard to inflationary pressures stemming from exchange rate volatility, and so the risks to the inflation projection continue to be assessed to the upside,” Kamilla Kaplan, an economist at Johannesburg-based Investec Ltd., said in an e-mailed note to clients.
Investors increased bets the bank will raise interest rates, with the forward-rate agreements starting in 12 months, used to lock in borrowing costs in the period, climbing as much as 25 basis points to 6.25 percent after Marcus’s speech.
“The inflation forecast remains uncomfortably close to the upper level of the inflation target range but our central forecast remains within the target,” Marcus said. “Given the increased upside risks to the outlook, we do not see room for further monetary accommodation. We will continue to monitor developments carefully on an ongoing basis and remain committed to act as required.”
The rand gained less than 0.1 percent to 10.1466 against the dollar as of 5:53 p.m. in Johannesburg. The currency’s 17 percent slide this year is the most of 16 major currencies tracked by Bloomberg.
“The statement seemed more hawkish,” Adenaan Hardien, chief economist at Cadiz Holdings Ltd. in Cape Town, said in an e-mailed note to clients. “The MPC statement spent considerable time on the rand. The MPC remains worried about the potential for significant further rand depreciation and its impact on inflation.”
The central bank cut its economic growth forecast for this year to 1.9 percent from 2 percent and predicted expansion of 3 percent in 2014 and 3.4 percent in 2015, Marcus said. The bank’s projections for this year are more pessimistic than the 2.1 percent estimated by Finance Minister Pravin Gordhan.
The Organization for Economic Co-operation and Development said on Nov. 19 the Reserve Bank should keep interest rates at the current low levels as long as inflation allows it.
“The policy dilemma is underlined by the deterioration in the growth outlook,” Marcus said. “The committee assesses the risks to be on the downside, amid continued supply disruptions and low business and consumer confidence.”