South Africa Keeps Interest Rate at 5% as Rand Plummets

South Africa’s central bank kept its benchmark interest rate unchanged as the rand’s plunge adds to pressure on inflation and wage demands surge.

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 19 of 20 economists surveyed by Bloomberg. One of the committee’s seven members argued for a rate cut, she said.

“The current level of the exchange rate, if sustained, poses a significant upside risk to the inflation outlook,” Marcus said. “The MPC assess the current stance of monetary policy to be accommodative. Given the risks outlined above, the scope for further monetary easing is limited at this stage.”

The rand has slumped 6.9 percent against the dollar since reaching a four-month high on May 3, the worst performer of 16 major currencies tracked by Bloomberg, restricting Marcus’s ability to stimulate an economy threatened by mining strikes.

The rand weakened as much as 1.3 percent to 9.6948 against the dollar today. It rebounded to trade at 9.5679 per dollar at 3:26 p.m. after Marcus said the rand tended to “overshoot” in both directions and has a tendency to retrace.

Borrowing costs have been kept unchanged since a half-point reduction in July. Marcus said it’s premature for investors to be pricing in a rate cut and the market “shouldn’t get ahead of itself.”

Inflation Risks

The inflation rate rises as much as 0.2 percentage point for every 1 percent decline in the rand, according to Johannesburg-based Standard Bank Group Ltd. Inflation was unchanged at 5.9 percent in April, close to the top of the bank’s 3 percent to 6 percent target range.

“The MPC is once again trapped in the middle, unable to change rates,” Peter Attard Montalto, an economist at Nomura Plc in London, said in an e-mail. The bank’s concerns “seem to be increasing both to the upside on inflation and to the downside on growth.”

Inflation is expected to average 5.8 percent this year, down from a previous estimate of 5.9 percent, and exceed the bank’s target in the third quarter, when it will average 6.1 percent, Marcus said. The inflation rate will probably average 5.2 percent next year and 5 percent in 2015, she said.

The threat of mining strikes ahead of wage talks is clouding the economic outlook. Strikes last year that shut gold and platinum mines shaved about 0.5 percentage point off the economy’s growth rate.

Growth Outlook

The outlook for the mining industry “remains bleak with threats of shaft closures and retrenchments, falling commodity prices, high wage demands and a risk of protracted periods of industrial action and further supply disruptions,” Marcus said. The MPC is “increasingly concerned” about above-inflation wage settlements, she said.

The central bank today cut its forecast for growth this year to 2.4 percent from 2.7 percent and projected economic expansion of 3.5 percent in 2014, down from 3.7 percent.

“Domestic growth prospects remain fragile amid low consumer confidence, continued output disruptions in the mining sector, electricity supply constraints and a weak global environment,” Marcus said.

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