South Africa Holds Key 5% Rate as Rand Stokes Inflation

South Africa’s Reserve Bank kept its benchmark interest rate unchanged for a fourth meeting as a slump in the rand stoked inflation, preventing policy makers from providing further stimulus to spur economic growth.

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 19 economists surveyed by Bloomberg.

The rand has fallen 8.2 percent against the dollar this year, the worst performer after the Japanese yen of 16 major currencies tracked by Bloomberg, driving up the cost of fuel and other imports. Inflation accelerated to 5.9 percent in February and will probably breach the central bank’s 3 percent to 6 percent target range in the third quarter, Marcus said.

“As long as the exchange rate remains weak, which it is, they are highly unlikely to cut,” Carmen Nel, an economist at Rand Merchant Bank in Cape Town, said in a phone interview. “The statement appeared to be balanced overall, where upside inflation risks are countered by downside growth risks.”

The rand strengthened to 9.2183 per dollar at 12:32 p.m. in Johannesburg from 9.2381 before the rate decision and 9.2458 late yesterday.

Marcus raised her inflation forecast for this year to an average of 5.9 percent from 5.8 percent and estimates it at 5.3 percent in 2014. The inflation rate is set to peak at an average of 6.3 percent in the third quarter of this year, before moderating to 5.2 percent in the fourth quarter of 2014.

‘Upside Risk’

Inflation expectations have increased this year as the rand weakened. The gap between yields on fixed-rate local-currency bonds due in September 2017 and similar-maturity inflation-linked debt, which investors use to gauge inflation expectations over the period, climbed 3 basis points today to 6.37 percentage points.

“The exchange rate of the rand continues to pose the main upside risk to the inflation outlook,” Marcus said. “However, the depreciated exchange rate provides an opportunity for the manufacturing sector in particular to become more competitive despite the challenging export environment.”

The rand’s decline was “somewhat overdone” and the currency tends to retrace after overshooting, the governor said. The central bank doesn’t target a level for the rand, which is likely to remain volatile, she said.

Mining strikes and a slowdown in Europe has cut exports, undermining growth in Africa’s largest economy. Finance Minister Pravin Gordhan last month forecast expansion of 2.7 percent for this year. That’s less than half the 7 percent annual growth the government estimates it needs to cut the jobless rate to 14 percent by 2020. South Africa’s unemployment rate of 24.9 percent is the highest of 30 emerging-market nations tracked by Bloomberg.

The MPC raised its forecast for economic growth this year to 2.7 percent from 2.6 percent and lowered next year’s estimate to 3.7 percent from 3.8 percent, Marcus said.

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